MINNEAPOLIS, MINNESOTA (July 18, 2022) – REBusiness Online recently featured the insights of Bob Hernandez, senior vice president/managing director of Northmarq’s Tampa debt/equity team, in its article titled “Borrowers, Lenders Reach an ‘Inflection Point’ in the Wake of Rising Inflation and Interest Rates.”
The story notes how this summer became a pivotal moment in the capital markets world as commercial real estate borrowers and lenders navigate rising inflation levels and interest rates. In regards to financing, borrowers are bringing more equity to deals, which has taken the form of preferred and joint venture equity.
“We’ll see a slowdown [in acquisitions] throughout the summer, but then pick back up once everybody adjusts to the new normal and the fact that rates are 200 basis points higher and that buyers need to bring more equity,” said Hernandez. “Buyers were quick to realize that debt was going to cost them more so they’re offering a little less. Sellers haven’t quite adjusted yet.”
On the refinancing side, lenders aren’t expecting any slowdowns because naturally borrowers have to refinance (or sell) once their loans mature. Hernandez stated that borrowers are eager to get ahead of any further interest rate spikes and prepaying their loans early, which he says is a major shift from recent years when interest rates were at historic lows.
“Before, I had a hard time convincing anyone to refinance early, even a year. They always waited,” said Hernandez. “Borrowers now want to refinance out of their construction or existing loan and get into a non-recourse, long-term, fixed-rate deal with one of our life companies or Freddie Mac and Fannie Mae as soon as possible.”
He added that a few borrowers are electing to go with floating-rate debt because of the flexibility it provides, plus some borrowers suspect that interest rates will come back down in the years ahead.
Hernandez went on to point out that a historical lens can assuage overly negative interpretations of current market conditions. “Borrowers who have been around for a while realize that historically low rates are gone,” says Hernandez. “They are not in the mid 2s to low 3s anymore, they’re in the high 4s to low 5s, but those are still good rates. Most of my career those rates have been higher.”