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The impact of interest rate increases on the real estate market

Commercial real estate developers and investors in Maryland have been paying close attention to statements coming from the Federal Reserve in recent months as economic experts became more convinced that historically low interest rates would be increased for the first time since 2006. Janet Yellen, the Fed's chairwoman, cited inflationary concerns when she announced the long-awaited hike on Dec. 16, and economists have disagreed about the impact that the 25 basis point increase will have on real estate markets.

The interest rate increase comes at an inopportune time for many commercial real estate investors as it coincides with the maturity of mortgage-backed securities worth billions of dollars that will now be more costly to refinance. Some fear that this factor combined with fears of future interest rate hikes could lead to a flurry of new borrowing that would make it more difficult for developers and investors to access capital as banks become more selective and begin to apply stricter lending criteria.

While even modest interest rate increases will result in costlier mortgages, they may also prevent another property market bubble by deterring imprudent speculation. Narrowing margins may also prompt developers and investors to improve efficiency levels and lead to the development of cost saving measure that could benefit the sector for years to come.

The profit potential of commercial real estate development can be high, but investors may sometimes have to bear significant costs for prolonged periods before they can be realized. Interest rate increases add to these costs, but they are a known factor and can usually be accounted for during a project's planning stages. Delays caused by disputes, zoning issues and permit problems are often unexpected and can lead to financial setbacks. Experienced legal counsel may be able to address such matters quickly in order to keep projects on track.

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