The Interconnection Between Business and Real Estate
Business and the real estate market are inextricably linked, even in an era as interconnected as today’s economy. Many different elements can—and do—affect property values and the investment possibilities available in the real estate market. Those elements can be broadly categorised as economic—like the current condition of the economy and its various sectors; behaviourist—like the past, present, and expected future actions of consumers; and politic—like the laws and regulations federal, state, and municipal governments enact, seemingly at any moment, to affect any aspect of our lives. Understanding how interest rates set by the Federal Reserve impact all points of this triad can—and, we argue, should—make real estate investors more effective at what we do.
The Role of Businesses in Economic Growth
The business sector is a crucial engine of economic growth and development. It creates jobs, contributes to the GDP, and stimulates demand for all kinds of goods and services. When businesses are doing well, they expand. When they expand, they create even more demand for real estate. They need production facilities; they need office space; they need places to put their stuff and sell it to you and me. They also need housing for their workers. So, if business is good, real estate is good, too. But when business sags, when firms begin to face headwinds—like higher operational costs, for example—they pull back. They defer expansion. They put plans on hold. They lay people off. And when they do these things, they directly affect the demand for real estate.
The Impact of Fed Interest Rates on Business Operations
The Federal Reserve’s interest rate decisions can have a substantial impact on how businesses operate. Rates set by the Fed affect the cost of borrowing throughout the economy. When the Fed raises rates, the long-term effect is that businesses are faced with higher borrowing costs. For many companies, this means that their incremental cost of capital is rising. When the cost of capital rises, some businesses pull back on expansion plans; others curtail their hiring. Because higher rates of interest also lead consumers to reduce their spending and to save more, rising rates have an immediate adverse effect on a substantial part of the economy. When the Fed lowers its rates, the cost of capital falls. Many businesses take this as a signal that they can and should push ahead with expansion plans, with hiring, and with the launch of new projects.
Real Estate Market Dynamics
Real estate investors need to watch business health and interest rates. When rates go up, mortgages get less affordable, and people buy fewer homes. Property values can drop as a result. If rates are low, though, the opposite plays out. With interest rates lower and homes that much more affordable, we can see more folks buying houses. And because we hit historic low levels of mortgage rates in 2020 and 2021, we saw property values grow and a more competitive real estate market to boot.
Strategies for Real Estate Investors
Here are some strategies that real estate investors can use:
1. Stay Informed: Keeping track of the current Fed interest rates and other key economic indicators can help savvy investors make even better timing decisions when it comes to the buying and selling of properties. Remember: interest rates affect the market as a whole and, more importantly, the prices of the specific properties within that market.
2. Diversify Investments: In addition to knowing when to invest, it’s also important to know where to invest, and for that, a real estate investor must have a diversified knowledge of a range of different markets across the country.
3. Focus on Location: One thing that never changes in real estate is that the three most important factors continue to be location, location, and location.
The relationship between business and the real estate sector is intricate. It’s one of our favourite areas to study because it touches on so many real-world factors and is, in many ways, at the heart of the economic engine. Current Fed interest rates, for example, have a direct effect on the business and real estate worlds. Adapting to life’s curveballs—from this current moment in history to those yet to come—is what builds a successful real estate enterprise.