Trends and Insights for 2025:

As we move into 2025, investment & commercial real estate(CRE) in Lafayette, Indiana, face a shifting landscape shaped by fluctuating lending interest rates. Rising interest rates, prompted by national monetary policy adjustments, have a direct impact on financing and investment dynamics and with interest rates continuing to trend upwards in the early months of 2025, understanding the influence of these rates on Lafayette’s commercial market is crucial for making informed investment decisions. These rates also have significant implications for residential multifamily properties (specifically 2-4 unit) affecting everything from acquisition costs to rental income potential. Here we will go through the three largest impacts of lending interest rates on residential investment and commercial real estate in Lafayette. 

1. Increased Financing Costs and Strained Cash Flow

One of the most immediate effects of rising lending interest rates is the increase in financing costs for CRE investors. As the Federal Reserve maintains a tight monetary policy to curb inflation, interest rates on commercial loans have risen sharply in recent years. According to data from the Federal Reserve, the benchmark federal funds rate reached 5.25% by the end of 2024, marking a significant increase from just 0.25% in 2021. This increase in rates has a direct impact on lenders’ mortgage rates, which in turn makes it more expensive for investors to acquire commercial properties.

In Lafayette, Indiana, a market with relatively affordable real estate prices compared to larger metropolitan areas like Indianapolis or Chicago, the impact of rising rates is pronounced. For example, the average interest rate on a 10-year commercial mortgage has increased from 3.5% in early 2021 to approximately 6.5% by 2025. For an investor financing a $2 million commercial property, this increase in rates could raise annual mortgage payments by approximately $40,000 to $50,000. This uptick in costs forces investors to reconsider their financial models, often leading to a reduction in acquisition volume or an increased reliance on alternative financing sources, such as private equity or bridge loans.

Moreover, higher interest payments can strain the cash flow of CRE owners, particularly those who have relied on low-interest loans in the past. For commercial property owners in Lafayette who are already facing rising operational costs, the compounded financial burden of increased interest rates may reduce their ability to reinvest in properties or pursue new acquisitions. This dynamic could lead to a slowdown in property development and transaction volume in Lafayette’s commercial market.

Now on the Residential Side:

The most immediate and tangible effect of rising lending interest rates on residential investment properties is the increase in financing costs. With the Federal Reserve’s federal funds rate reaching 5.25% by the end of 2024, mortgage rates for residential investment properties have surged. According to Freddie Mac, the average 30-year fixed mortgage rate for non-owner-occupied properties hit around 6.75% in early 2025, up from 3.25% in 2021. This increase in rates translates directly to higher monthly mortgage payments for investors.

For example:

Consider a Lafayette investor purchasing a duplex or triplex for $400,000 with 25% down ($100,000). At a 3.25% rate in 2021, the investor would have faced a monthly mortgage payment of roughly $1,600. However, at 6.75% in 2025, this payment increases to approximately $2,300 per month—an increase of $700. Over the course of a year, this translates to an additional $8,400 in mortgage payments. 

For investors with thin profit margins or those relying on rental income to cover mortgage costs, these increases can have a significant impact on overall profitability.

While Lafayette’s residential investment market remains relatively affordable compared to larger cities, these added financing costs are still a burden. As a result, many investors may either raise rents to offset higher operating costs or delay acquisitions in hopes that interest rates will stabilize. Both outcomes could have broader implications for the local rental market, with potential rent increases making affordability an issue for renters.

2. Decreased Property Valuations and Investor Caution

Another major consequence of higher lending interest rates is a potential decrease in property valuations. As the cost of financing increases, prospective buyers are less willing to pay premium prices for commercial properties, particularly those reliant on financing for acquisition. A higher cost of capital directly affects the capitalization rate (cap rate), which is a key metric used to determine property values. In general, when interest rates rise, cap rates also rise, which in turn lowers property valuations.

Data from the National Association of Realtors (NAR) suggests that the cap rate for commercial properties has increased nationwide, and this trend is evident in Lafayette as well. As of Q1 2025, the average cap rate for Lafayette’s commercial office buildings has risen from 6.0% to 7.5%, mirroring national trends. This shift is mainly driven by investors seeking higher returns to offset the increased cost of debt. For example, a Class B office building in Lafayette that was previously valued at $3 million based on a 6.0% cap rate may now only command a value of around $2.7 million with a 7.5% cap rate.

The decrease in property values and increased caution among investors is particularly evident in sectors that are more sensitive to interest rate fluctuations, such as multifamily and office properties. Investors may find it challenging to secure the same level of returns on these types of assets, leading to a reevaluation of risk and investment appetite in the Lafayette market.

Moreover, tighter credit conditions have made lenders more conservative in underwriting loans. According to the Mortgage Bankers Association (MBA), the availability of credit for commercial real estate loans has tightened, with fewer loans being approved for riskier assets. This has led to fewer transactions in Lafayette, especially in higher-risk areas such as speculative office space or retail properties.

And Now, The Residential Side:

Another significant consequence of higher lending interest rates is a potential decrease in property values. In general, rising rates lead to higher capitalization (cap) rates, which reduce the market value of residential properties. This is particularly relevant for multifamily properties, as investors often calculate potential returns using cap rates, which are influenced by interest rates.

In Lafayette, the cap rate for multifamily properties (2-4 units) has increased in tandem with rising interest rates. According to a report from the National Association of Realtors (NAR), Lafayette's multifamily cap rates moved from around 6.0% in 2021 to 7.5% in 2025. 

Consider this:

A multifamily property valued at $400,000 at a 6.0% cap rate would yield an annual income of $24,000. However, under the new 7.5% cap rate, the same property may only be valued at around $320,000, reflecting a drop in property value of over $80,000. 

This creates challenges for investors looking to either sell their properties or refinance existing loans.

For potential buyers, the higher rates make it more difficult to secure financing at favorable terms, which in turn reduces the pool of eligible buyers and further depresses property prices. Additionally, as the return on investment decreases due to higher rates, many investors are becoming more cautious in their purchasing decisions, waiting for more favorable market conditions. This cautious stance can lead to a slowdown in transactions, both in terms of sales and new acquisitions, affecting the overall liquidity of Lafayette's residential investment market.

This decrease in property values may benefit buyers with significant cash reserves or those with access to alternative financing sources, but it puts first-time or smaller investors in a challenging position, especially when traditional financing becomes less accessible.

3. Rental Market Pressures and Demand Shifts

Increased lending rates not only affect property acquisition and financing but also have a significant impact on the local rental market. With fewer individuals able to purchase homes due to the higher cost of financing, the demand for rental properties, particularly multifamily units, is expected to rise. This shift is already observable in Lafayette, where the vacancy rate for rental properties in the 2-4 unit category dropped from 6.5% in early 2024 to 4.1% in late 2024, according to the U.S. Census Bureau’s Housing Vacancies and Homeownership report.

This demand increase may seem like a positive development for multifamily investors, but it comes with its own set of challenges. As financing costs rise, investors who are feeling the strain on their cash flow may be inclined to raise rents to maintain profitability. In Lafayette, where rents have been relatively stable over the past few years, some multifamily owners are now seeing opportunities to increase rents by 5-10%, in line with national trends.

However, while higher rental prices may help offset rising financing costs, they also come with risks. If rental prices increase too quickly, it could price out lower-income tenants, creating higher turnover rates and vacancies. This has already been known to happen in some Lafayette neighborhoods particularly close to the downtown area and up to the columbian park area, where the influx of Purdue University students and young professionals has driven up demand, but the rising costs of living are pushing some tenants into less expensive alternatives outside the city.

Additionally, for multifamily investors, rent increases may face scrutiny from local authorities or tenant advocacy groups. Rent control measures or affordable housing initiatives could be introduced if the rental market becomes too volatile or unaffordable for the average resident, creating further regulatory risks for investors. Indiana is traditionally a landlord friendly state, but this is a topic to keep an eye on. 

Conclusion

In summary, the rising lending interest rates in 2025 are having a significant impact on the commercial real estate market in Lafayette, Indiana. Investors are feeling the pressure from increased financing costs, which lead to higher expenses and lower returns on investment. In addition, property valuations are under pressure, as higher rates elevate cap rates and reduce buyer willingness to pay premium prices. Finally, with traditional lending avenues becoming less accessible, many Lafayette investors are exploring alternative financing structures such as private equity and seller financing to navigate the new market realities.

As the economic landscape evolves, investors in Lafayette must remain agile, adjusting their strategies to accommodate these shifts. Whether through creative financing solutions or a more conservative approach to acquisitions, or hedging with conservative value-add projects (my personal favorite), understanding the impact of interest rates will be key to success in Lafayette’s investment real estate market throughout 2025.

Sources:

• Federal Reserve, "Federal Funds Rate," January 2025.
• Source: Federal Reserve's official website provides updates on the federal funds rate.
• Link: https://www.federalreserve.gov/monetarypolicy.htm
• National Association of Realtors (NAR), "Commercial Real Estate Trends Report," Q1 2025.
• Source: MBA’s research and reports on commercial and multifamily lending.
• Link: https://www.mba.org/news-research-and-resources/research-and-economics
• Freddie Mac, "Mortgage Market Survey," January 2025.
• Source: Freddie Mac provides mortgage market data and trends.
• Link: https://www.freddiemac.com/pmms
• National Association of Realtors (NAR), "Multifamily Housing Market Report," Q1 2025.
• Source: NAR’s specific reports on the multifamily housing market are available through their research section.
• Link: https://www.nar.realtor/research-and-statistics
• U.S. Census Bureau, "Housing Vacancies and Homeownership Report," 2024.
• Source: The Census Bureau publishes regular reports on housing vacancies and homeownership.
• Link: https://www.census.gov/housing/hvs/

By visiting these links, you’ll be able to access the most up-to-date data and reports that provide insights into the topics discussed in the above article.