Commercial Real Estate, Capital Markets and the Gulf Coast Growth Story

Higher for longer?

by Pratt Thomas

For much of the past two years, business owners, investors and developers have been asking the same question: “When will interest rates come down?”

Following the Federal Reserve’s June meeting, a different question may be more appropriate: “What if they don’t?”

While the Federal Reserve elected to leave interest rates unchanged, the meeting revealed a more cautious outlook than many had anticipated. The Fed’s updated projections showed a growing divide among policymakers, with several officials indicating that additional rate increases may still be necessary if inflation persists.

For businesses making investment, expansion and financing decisions, the message is clear: Today’s interest rate environment may be with us longer than many expected.

From a commercial real estate perspective, that realization is beginning to reshape decision-making across the market.

Over the past year, we have observed a significant shift in conversations with investors, business owners, lenders and tenants. Twelve months ago, many decisions were being delayed in anticipation of lower borrowing costs. Today, more people are accepting that waiting for dramatically lower rates may not be a strategy at all. Instead, businesses are returning to the fundamentals.

The question is no longer whether interest rates are ideal. The question is whether an investment, acquisition, expansion or development opportunity makes sense at today’s rates. That shift in mindset is healthy for the market.

Contrary to some perceptions, capital remains available. Local and regional banks have become more profitable with balance sheet repricing and continue to lend; private capital remains active and institutional investors continue to seek opportunities. However, capital has become more selective.

Lenders are placing greater emphasis on cash flow, debt service coverage, tenant quality, management experience and overall project fundamentals. Transactions that demonstrate strong economics continue to move forward, while speculative projects face greater scrutiny. This environment rewards disciplined decision-making.

Within commercial real estate, the strongest demand continues to come from industrial and logistics-related properties. The Gulf Coast remains well-positioned to benefit from long-term investments in manufacturing, aerospace, maritime industries and distribution networks.

Capital often flows toward growth, and few examples illustrate that better than the Port of Mobile. While investors nationwide continue to debate the future direction of interest rates, public and private stakeholders are investing hundreds of millions of dollars into expanding the Port’s container handling capacity, rail connectivity and logistics infrastructure. Those investments reflect a long-term belief in the Gulf Coast’s role as a growing manufacturing and distribution hub.

That confidence was reinforced recently when S&P Global Ratings upgraded the Alabama Port Authority’s credit rating and assigned a positive outlook, citing strong financial performance and confidence in the Port’s long-term growth strategy. Credit rating agencies are not known for optimism. Their role is to assess risk. When they recognize improving fundamentals and support for future investment, it sends a powerful signal about the strength of the region’s economic outlook.

Retail real estate has also proven more resilient than many expected. Well-located centers serving growing communities continue to perform well, particularly those anchored by essential goods and services. Investors remain attracted to properties that offer stable occupancy and predictable cash flow.

Office properties present a more nuanced picture. While demand has softened nationally, businesses still value quality office space that supports collaboration, culture and operational efficiency. The strongest-performing properties tend to be those that offer modern amenities, flexible layouts and convenient locations. We have also seen strong demand for satellite office space along the Eastern Shore for Mobile-based companies to accommodate employees who, during COVID, became accustomed to staying on the Eastern Shore.

Perhaps the most significant capital markets story over the next 18 months will involve refinancing activity. Many commercial properties were financed during the historically low interest rate environment of 2020 and 2021. As those loans mature, owners are facing refinancing rates substantially higher than what they secured just a few years ago.

For some, refinancing will simply mean accepting a higher cost of capital. For others, it may require additional equity contributions, restructuring debt or re-evaluating ownership strategies. In certain cases, these pressures may create acquisition opportunities for investors with available capital and a long-term investment horizon.

As a result, we are beginning to see increased transaction activity as buyers and sellers adjust to the realities of today’s market.

Looking ahead, we believe businesses should spend less time trying to predict the Federal Reserve’s next move and more time evaluating their own strategic objectives.

Whether acquiring a facility, expanding operations, refinancing debt or investing in commercial real estate, successful decisions will be driven by business fundamentals rather than speculation about future interest rate movements.

The Gulf Coast economy continues to benefit from strong economic drivers, a growing industrial base and significant public and private investment. While challenges remain, these fundamentals provide a solid foundation for future growth.

The capital markets may not be as accommodating as they were several years ago, but opportunities continue to exist for businesses and investors who remain disciplined, well-prepared and focused on long-term value creation.

In today’s environment, success is less about timing the market and more about understanding it.

Pratt Thomas is the president of Merrill P Thomas Co., Inc., and is a distinguished professional with more than 20 years’ experience in the real estate, banking and construction industries. His career is marked by a proactive approach and a results-driven mindset, coupled with extensive expertise in development, brokerage services and property management.