If interest rates rise, what is the likely impact on commercial property that has a long-term, fixed rent lease?

When interest rates rise, it generally leads to higher borrowing costs for investors and buyers. This increase in costs can affect the demand for commercial property. A long-term, fixed rent lease means that the rental income is locked in for the duration of the lease, making it less flexible in adjusting to changing market conditions.

If interest rates rise and borrowing becomes more expensive, potential investors may find it more costly to finance a purchase, which can lead to a decrease in demand for commercial properties. As demand wanes, property values typically decline because buyers may be less willing to pay high prices if their financing costs are high and their potential returns on investment are lower.

Additionally, for existing leases with fixed rents, the property might not be able to compete with newly developed properties that can adjust rents according to the higher interest rate environment. This further contributes to a potential decrease in property value as the income generated from the lease does not keep pace with the cost of capital and current market rental rates.

Thus, the interplay between rising interest rates and the fixed nature of long-term leases creates pressure on the value of the property, leading to a likely decrease in property value.