Commercial Real Estate Interview Questions (CRE)
We’ve put together the most frequently asked commercial real estate (CRE) interview questions in the following post to help candidates prepare for CRE roles.
Q. What happens to the property values in the commercial real estate (CRE) market when interest rates rise?
When interest rates rise, the capitalization rates most often follow suit. Moreover, if cap rates increase, property values tend to decline.
However, there are some economic benefits that can help mitigate the decrease in property values.
Fundamentally, rising cap rates are frequently a sign of a strong real estate market and economy, signifying that the real estate outlook is likely positive.
Since rising interest rates mean financing costs are higher, the pace of new supply (i.e. new properties flowing into the market) can slow down while demand remains the same – so rent tends to increase in such times.
Q. Why do higher interest rates cause real estate purchase prices to decline?
If interest rates increase, borrowing becomes more expensive, which directly impacts the returns of real estate investors.
In a higher interest rate environment, investors must offset the higher cost of financing with a reduction to purchase prices – since a lower purchase price increases returns (and enables them to achieve their targeted return).
Therefore, as interest rates climb upward, cap rates are also expected to rise, placing downward pressure on pricing.
Q. What is the net absorption rate?
The net absorption rate is a measure of supply and demand in the commercial real estate market, so the metric attempts to capture the net change in demand relative to supply in the market.
Calculating net absorption involves taking the sum of physically occupied space in square feet and subtracting the sum of square feet that became physically vacant over a specified period, most often a quarter or a year.
Net Absorption Formula
- Net Absorption = Total Space Leased – Vacated Space – New Space
Q. What is the difference between positive and negative net absorption?
- Positive Net Absorption: More commercial real estate was leased relative to the amount made available on the market, which suggests there is a relative decline in the supply of commercial space available to the market.
- Negative Net Absorption: More commercial space has become vacant and placed on the market compared to the amount that was leased, indicating the relative demand for commercial real estate has declined in relation to the total supply.