The sky may be the limit as interest rate caps continue to rise
Rising interest rates weighed on commercial real estate, especially as interest rate caps are getting expensive enough to kill business. Grant Cardone, CEO of Cardone Capital, told GlobeSt.com a month ago: “In the last 18 days I had about a billion dollars worth of real estate that I was trying to buy. [fall through]due to financial realities.
But what has happened since? It’s the same with financial terms, and that’s frustrating for many.
The Fed has overcorrected when it comes to raising rates,” said Meg Epstein, CEO and founder of CA South in Nashville. “They could raise them to 8% tomorrow and that wouldn’t lower the next set of inflation numbers because inflation is a lagging indicator. They’ve already tightened enough to reduce demand significantly and drive prices down. It It will just take time for it to show in their numbers. During that time, the Fed will continue to tighten and inevitably overcorrect, just as it overstimulated after the economy was already well on its way to recovery.
“Rates have increased over the past 30 days which has impacted price caps and we continue to see interest rate fluctuations,” Sean Burton, CEO of Cityview, told GlobeSt.com. “Given the current uncertainty, we, like many others, have tightened our underwriting and are all the more selective with our offerings.” There are still “selected attractive buying opportunities”, but they need “strong projected risk-adjusted returns”.
“Interest rate cap costs have risen sharply over the past two months and the trend continues,” says Adil Hasan, director of real estate at Yieldstreet. “We are seeing a significant slowdown in transaction volume as potential buyers cannot justify pricing in the face of higher interest rates and capping costs, while sellers are slow to accept the price reduction.”
“Everyone is waiting for cap rates to rise and prices to fall,” says Joshua Mogin, partner at Thompson Coburn. “I had a couple of lower offers because the buyers said you had to lower the price and the sellers said no.”
Many lenders Joshua Mogin deals with are adjusting their plans. “It’s kind of like an assortment of what different lenders do,” he says. “A lot of debt fund lenders are putting in programs with some sort of rate adjustment intervals, and those are bridge loans.” Rather than a direct arrangement of 7% or 8%, they will accept 7% but then seek an adjustment in six months to a year. “Some large borrowers over the past month have purchased large amounts of hedges, but they are big players who can afford to do this and are willing to spend that money.”
And then there are the banks. “A lot of banks that have spent so much money in the first six months have already done what they did last year, or in the neighborhood,” Mogin says. “No one feels pressure to keep lending necessarily at this level.”