Higher Interest Rates Are Reshaping Boise Commercial Real Estate Decisions

Interest rates are moving in the wrong direction again—and while the latest headlines are focused on home mortgages, commercial real estate investors should be paying attention too.

U.S. mortgage rates recently climbed close to their highest levels in a year as inflation concerns, higher energy prices and geopolitical uncertainty pushed Treasury yields upward. For Boise commercial real estate, the bigger issue isn’t the residential mortgage number itself. It’s what higher long-term borrowing costs tell us about financing conditions across the economy.

According to reporting by Dan Burns of Reuters, published by the Idaho Business Review, the average contract rate for a conventional 30-year fixed mortgage reached 6.76% for the week ending July 24, while the 15-year fixed rate climbed to 6.15%.

You can read the original Idaho Business Review article for the underlying national housing and interest-rate reporting.

For Boise investors, developers and property owners, this is another reminder that the hoped-for return to cheap capital remains difficult to predict.

The Bigger Issue Is What’s Happening to Treasury Yields

Mortgage rates don’t move exactly with the Federal Reserve’s short-term interest rate.

Longer-term Treasury yields are especially important because they influence borrowing costs throughout the economy.

The 10-year Treasury yield was around 4.63% when Reuters reported the story, after recently reaching approximately 4.70%, its highest point in about 18 months.

That matters to commercial real estate.

Commercial lenders generally price loans using a benchmark rate plus a spread reflecting the property, borrower, leverage and overall risk.

When benchmark rates remain elevated, commercial borrowing can remain expensive even if a property itself is performing well.

The latest pressure has been tied partly to inflation concerns. Reuters reported that the Federal Reserve’s preferred inflation measure had been running at a 4.1% annual pace in May, with expectations for some moderation afterward.

But renewed geopolitical tension and higher oil prices complicate the outlook.

Energy costs can filter into transportation, construction, manufacturing and consumer prices. If inflation remains stubborn, interest rates may have to stay higher for longer—or potentially move higher.

That’s the scenario commercial real estate investors need to watch.

What Higher Rates Mean for Boise Commercial Real Estate

The residential market provides a useful example of what expensive money does to demand.

Mortgage application activity dropped 6.4% in one week, according to Mortgage Bankers Association data cited by Reuters. Refinancing applications fell nearly 10%, while purchase applications also declined.

Commercial real estate reacts differently, but the basic financial pressure is similar.

When borrowing becomes more expensive, buyers can’t necessarily pay yesterday’s prices and still achieve today’s required returns.

Consider a simple investment property.

If an investor could previously finance an acquisition at a significantly lower interest rate, the property’s income could support more debt while still producing an acceptable cash-on-cash return.

Raise the borrowing cost, and the equation changes.

Something has to adjust:

The buyer puts down more equity, the property’s income increases, the buyer accepts a lower return—or the purchase price comes down.

That tension remains one of the biggest issues in Boise investment property transactions.

Sellers often remember values established during the low-rate years. Buyers are underwriting properties using current debt costs.

The gap between those two perspectives can slow transactions.

Boise Development Faces Another Layer of Pressure

Higher rates aren’t only an acquisition problem.

They’re also a development problem.

A developer looking at a new retail, office, industrial or mixed-use project has to consider land costs, construction expenses, tenant improvements, financing costs and the rent required to make the project economically viable.

Higher construction loan rates increase carrying costs before a project even opens.

That can make marginal projects difficult to justify.

For Boise development, this could have several effects.

Projects may take longer to start. Developers may seek more preleasing before construction. Some projects may require additional equity. Others could be redesigned or delayed until rents, construction costs or financing conditions improve.

That doesn’t mean development stops.

It means underwriting becomes less forgiving.

And that can ultimately affect future commercial real estate supply throughout Boise, Meridian, Eagle, Nampa, Caldwell, Kuna and Star.

Retail Leasing Boise: Tenants Feel Rates Indirectly Too

Most retail tenants aren’t thinking about the 10-year Treasury when they’re deciding whether to open another location.

But they can still feel its effects.

Landlords financing new construction at higher rates may need stronger rents to justify development.

Existing landlords refinancing properties could face larger debt payments.

Businesses themselves may also be borrowing at higher rates to finance equipment, inventory, construction and tenant improvements.

That can make expansion more expensive.

For retail leasing in Boise, this increases the importance of negotiating the entire deal rather than focusing only on asking rent.

Tenant improvement allowances, free rent, delivery condition, lease term, renewal options and landlord contributions can become extremely important when tenants are trying to conserve cash.

In some cases, a landlord capable of funding more improvements may have an advantage over a competing property with a slightly lower rental rate.

Local Insight: Underwrite the Property at Today’s Cost of Capital

One mistake investors can make in an uncertain rate environment is building an acquisition around the assumption that rates will soon fall.

They might.

But the property should still make sense if they don’t.

I would rather see a Boise commercial real estate investor purchase a property that works with today’s financing and later benefit from refinancing if rates decline.

The opposite strategy creates more risk.

If an investment only produces acceptable returns because the buyer assumes interest rates will fall significantly next year, the buyer isn’t simply investing in real estate.

They’re also making a large interest-rate bet.

That is particularly important when evaluating properties with near-term loan maturities, large tenant improvement requirements or leases that could roll during the first few years of ownership.

Debt should be part of the underwriting from day one.

Higher Rates Could Also Create Opportunities

There is another side to this market.

Periods of expensive capital can create opportunities for well-capitalized buyers.

Owners facing refinancing may discover that their property can’t support the same amount of debt it carried several years ago. Some may need to contribute additional equity.

Others may decide to sell.

That could create opportunities for investors with cash, lower leverage requirements or access to alternative financing.

Owner financing may become more attractive in certain transactions as well.

For owner-users, purchasing a commercial building can still make sense when the alternative is paying rent indefinitely—especially if the business plans to occupy the property for many years.

And for investors, strong properties with durable tenants and growing income can remain attractive even in a higher-rate environment.

The difference is that investors need to be more selective.

What Boise Investors Should Watch Next

The mortgage market is only one signal. For Boise commercial real estate, I would watch several indicators together:

• The 10-year Treasury yield and its direction.
• Federal Reserve policy and inflation data.
• Commercial bank lending standards and loan spreads.
• Local cap rates and actual closed-sale pricing.
• Refinancing activity and upcoming loan maturities.
• Construction starts and projects being delayed.
• Tenant demand across retail, industrial, medical and office properties.

The key question isn’t simply, “When will rates come down?”

A better question is:

“Does this deal still work if rates stay higher than expected?”

Boise and the broader Treasure Valley continue to have important long-term growth drivers. But population growth doesn’t erase financing costs.

In today’s market, the properties most likely to trade are those where buyers and sellers recognize the new cost of capital and structure the transaction accordingly.

That adjustment may be uncomfortable, but it can also create the next round of opportunities in Boise real estate and Idaho commercial real estate.

Mike Gioioso (joy-OH-so)
has for 16+ years been helping companies of all sizes buy, build, and lease perfect places for business in greater Boise, Idaho and beyond.
www.streetsmartidaho.com mike@streetsmartidaho.com 208-209-9166

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