(Graph courtesy of Bruce Barrett)
The Fed has cut interest rates twice in 2024 and is poised for another possible .25% cut before year end. What will that mean for Central Oregon’s commercial real estate market in the New Year?
Here are three possibilities with guidance from Dan Stake, Commercial Markets Director at Mid Oregon Credit Union and Jacob Mayhill, Commercial Loans Relationship Manager at Mid Oregon Credit Union.
1) Increased Transaction Activity: The interest rate cut is expected to boost transaction activity in the commercial real estate (CRE) market. Lower interest rates reduce the cost of borrowing, making it more attractive for investors to finance new deals and refinance existing properties. This could lead to a rise in sales and refinancing activity as investors take advantage of less expensive capital.
a) Example: We might see a surge in owner/user commercial projects as businesses look to expand, taking advantage of the lower interest rates to secure favorable financing terms.
Q: Is this interest rate reduction enough to encourage investors to deploy their capital?
A: Stake and Mayhill think lower interest rates will certainly help but the lowering of rates in 2024 did not translate directly into lower commercial lending rates. They say that it is more an issue of borrowers getting accustomed to the idea that for the long term, loan rates rates are not expected to move substantially however that could change post inauguration.
2) Improved Cash Flow: With lower interest rates, the cost of debt servicing decreases, improving cash flow for property owners. This additional cash flow can be reinvested into property improvements, expansions, or acquisitions, potentially driving further growth in the CRE sector.
a) Example: We could see an owner refinance a shopping center, reducing monthly payments and use the savings to renovate the property, attracting new tenants.
Q: Do you see any new commercial activity from local businesses?
A: Stake and Mayhill think the national sentiment is more positive going into the New Year. Locally, they see increased activity, particularly in outlying areas such as La Pine, Prineville and Redmond. Lower housing costs in these regions is encouraging interest in commercial projects to meet growing demand for local services.
3) Sector-Specific Impacts: While the overall market is likely to benefit from the rate cut, the impact may vary across different CRE sectors. For example, sectors with floating rate debt or those that are more sensitive to interest rate changes, such as multifamily real estate, may see more significant benefits compared to sectors with fixed-rate debt. It’s worth noting that development costs can impact projects, especially in areas experiencing rapid growth like Bend. High costs for land, materials, and labor can sometimes lead to delays or even cancellations.
a) Example: We could see developers start new mixed-use projects combining residential and commercial spaces, betting on the area’s growing popularity and the favorable financing conditions.
Q: Are there any local project that reflect this enthusiasm?
A: Stake and Mayhill say that Mid Oregon has participated in some recent project around the region and expect to see more. Mid Oregon has new, innovative programs that help reduce lending costs and they can package together construction financing with long term financing that encourages affordable housing projects.
Stake added, “An additional project happens to be our own and that’s our 8th branch location and 3rd full-service branch in Bend located in the Old Mill District above the Regal Cinemas. That branch is scheduled to open in early 2025. This will help us serve households and businesses in this area and throughout the east and West sides of Bend.”
Central Oregon, with its favorable living conditions, can expect to see strong growth. Businesses will find ways to meet the demand. Stake and Mayhill, along with Mid Oregon Credit Union are gearing up for a more robust 2025 throughout Central Oregon.
