Yes, things can get worse, but there are still sources and opportunities, depending on the deal.
TAMPA, FLORIDA (February 10, 2023) - When experiencing pain, the natural human response is to ask when it might stop. That is what commercial real estate, among other industries, have been doing. When will inflation end and the Federal Reserve stop hiking rates?
The answer to the first is that inflation is slowing. But to the second, when the Fed thinks it’s time. Even though the increase to the benchmark federal funds rate was only a quarter point on Wednesday, the central bank was clear that it wasn’t done.
“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” a Fed statement noted. “In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.”
So, the question currently is one of how much to raise rates, not whether increases should continue — at least for now.
The impact on CRE is significant for short-term funding in particular. “It will affect the cost of short-term floating-rate debt; however, longer-term permanent financing has already priced it in. I don’t see much movement in the treasury/index,” says Robert Hernandez, senior vice president and managing director of NorthMarq’s Tampa regional office.
In one sense, as Hernandez notes, the extra quarter point may not represent a large incremental impact because “it’s already difficult to secure financing.” However, the bigger issue is the total impact of all the rate increases.
“The challenges for commercial real estate lie less in today’s uptick than in how long we’ve been in a high interest rate environment; financing costs are roughly double what they were six months ago,” says Dennis Malloy, who is in commercial loan originations at Alliant Credit Union. “The longevity of this high-rate environment means that borrowers are facing the proposition of selling at higher cap rates or refinancing at significantly higher interest rates than their current debt.”
But not all is gloomy. “The lenders on the sidelines will likely stay there for now,” adds Malloy. “On the other side of that coin, deals with strong cashflow today can still secure financing, and this minor rate increase won’t affect that. Fannie and Freddie are still lending, and there are banks and credit unions in the market for deals with good fundamentals.”