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Optimism about CRE persists despite interest rate hikes

Many California real estate developers have prospered in recent years as major markets like Los Angeles and San Francisco have thrived. Commercial property prices in other gateway cities have also risen sharply since the 2008 financial crisis, and both entrepreneurs and leading executives expect this rapid growth to continue. However, government regulators have raised questions about lax underwriting standards, and the Federal Reserve has once again started to raise interest rates to keep inflation in check and curb risky borrowing.

Rising borrowing costs do not appear to be dampening the enthusiasm of the business leaders. The Federal Reserve announced the third interest rate hike in four months on March 15, and economic experts expect at least two more increases before the year ends. The business community generally reacts to such news with caution, but a Business Roundtable poll of 100 leading CEOs reveals that enthusiasm remains extremely high. Another survey from the National Federation of Independent Business suggests that small business owners are just as bullish.

Business owners and executives may be reacting to President Trump's vow to slash regulations and reduce oversight. Government regulators fearing another real estate bubble have called for tighter lending controls in the commercial sector, but many industry analysts believe that the introduction of sweeping new regulations is unlikely in the current political climate.

Interest rate increases can make it harder for commercial property developers to obtain financing, and the loan packages that are on offer may contain terms that could be difficult to meet. Attorneys with experience in complex commercial real estate transactions may be able to help developers come to more informed decisions by scrutinizing loan documents closely and pointing out provisions that could be problematic.

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