‘Chilling effect’: Baton Rouge real estate investors wary of rapid rise in interest rates

“Even in a market where you have 6.5%, 7% interest rates, it’s not going to completely kill investment, but the criteria is going to be a little different,” Legendre said.

With rising interest rates, it’s cheaper for some businesses to rent property instead of own it, Pesnell said. However, property owners will likely have to raise their rental rates to offset higher costs for borrowing and construction.

“It’s going to have to equate into a rise of rental rates in order for it to be sustainable,” he said.

The market moving forward

There’s still plenty of reason for optimism in the market, brokers and bankers said.

In 2020 and 2021, amid COVID uncertainty, most commercial tenants downsized their space and extended their leases by only a year, Pesnell said. But at the end of 2022, that trend began to fade.

“Back in 2020, 2021, people were thinking, ‘Do we even need office space at all? Or do we need half of we had?’” Pesnell said.

Legendre said investors will have to adjust, but sectors like petrochemical and industrial should continue to see solid activity.

“As quickly as they lowered (rates), they’re coming back and raising them, and it’s just a knee-jerk reaction,” Legendre said. “I’m not smarter than the Fed for sure, but common sense will tell you that there’s going to be fallout from this.”

Scott Singletary, senior vice president of Concordia Bank and Trust, said he hasn’t seen any major price corrections yet in the market, though he has had customers choose to “sit on the sidelines” until the dust settles.

“Supply and demand is still driving the prices that are out there,” he said. “Some areas have slowed some, but there haven’t been any big price corrections. There will probably some price corrections in the future.”

Higher interest rates can present an opportunity for well-positioned investors as smaller players bow out of the market, said Mike Nizzo, southwest regional president for b1Bank. Investors who can weather higher rates can buy properties now, then “right size” expiring leases to create a better cash flow.