Commercial Real Estate Risks Eyed By Federal Reserve

Commercial Real Estate Risks Eyed By Federal Reserve

Chicago developers and businesses that are involved in the commercial real estate industry should be aware that the Federal Reserve is concerned that apartment towers may be the next asset-price bubble and is considering raising interest rates as a means to avoiding a burst in the sector. The Fed is reportedly concerned that continued low-interest rates might lead to investors reaching for high yields while prices remain high. A commercial real estate and business transaction lawyer believes that it is important for businesses to conduct due diligence about the market before entering into a commercial real estate transaction.

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infographic_Commercial Real Estate Risks Federal Reserve

Gradual Increase in Interest Rates Expected

The Federal Reserve is planning to rely more on financial supervision of the commercial real estate industry rather than suddenly increasing interest rates. Instead, the Fed plans to increase the rates gradually with three rate hikes of a quarter percent expected during 2017. While the residential real estate market has recovered gradually since the burst in the residential real estate bubble, the Fed believes that the commercial real estate market’s apartment sector may be overheated, leading to concerns. Federal Reserve Chair Janet Yellen identifies the current risk as moderate for the financial stability of the market.

Due Diligence With Commercial Real Estate Transactions

A business transaction lawyer understands the importance of conducting due diligence before diving into commercial real estate transactions. It is important for businesses, developers and investors to thoroughly research the seller, property, compliance obligations and financing to mitigate and reduce post-transaction surprises. This includes a thorough investigation of any zoning restrictions, encroachments, and liens that may exist on the properties, The properties should also be closely inspected to identify any needed structural and other repairs and the costs involved with them. Potential investors should also investigate whether the seller has any liabilities that the buyers could inherit because of regulatory or other violations before entering into contracts. For properties that will largely be financed, investors should also investigate whether or not they will be able to keep up with the payments after purchasing them.

A business transaction lawyer recommends that people and businesses take the time to conduct the proper due diligence before entering into purchase contracts for commercial real estate. If the investors have done so, they might want to take advantage of the currently low-interest rates before the expected hikes both in 2017 and in the future.

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