Inflation, Interest Rates and CRE in the San Francisco Bay Area

October 13, 2022

What do rising interest rates and inflation mean for the commercial real estate market in the San Francisco Bay Area?

While short-term borrowing costs have increased dramatically, the regional commercial real estate industry will be more impacted by long-term bond yield such as the 10 Year US Treasury, which spiked at 3.4% in mid-June 2022. Despite short-term rate increases, the yield rate has since declined to about 2.7% as of the end of July 2022. Investors report their expectations are for increasing Treasury yields through year-end.

In the near term, market participants will likely execute very few transactions through the remainder of the year, and into early part of 2023. Debt rates are increasing rapidly; we have observed pending sale transactions of commercial real estate that have fallen out of escrow while buyers were seeking financing. We expect to see more creative financing, such as seller-carried financing, loan assumptions, and wrap mortgages – as examples, when deals do close.

Despite investor caution, deals do continue to occur, though at a slower pace and with different contract terms. It is likely that only the best properties will trade in the latter half of 2022. High-quality tenancies with long-term leases remain the most sought-after investments. Lower-quality properties that can be assembled into development sites as large as one-acre, or greater, will likely reflect land value for other commercial real estate sectors, such as life sciences, multi-family residential, or mixed uses.

During uncertain economic times, you can trust the quality and depth of a Valbridge Property Advisors appraisal. Learn more about the impact of the economy on major asset classes in the San Francisco Bay Area, and how your specific property type is affected at the market and submarket level in addition to your property valuation. Contact us to discuss your valuation needs today.

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