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Canceled Contracts Pile Up As Real Estate Buyers, Lenders Reckon With Rising Rates

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Some commercial real estate transactions have collapsed nationwide as markets have emerged from the highest interest rate environment of more than a decade and a cloud of economic uncertainty has gathered.

Both construction loans and financing for real estate purchases will be expensive due to the Fed’s decision.

As borrowing costs rise, prices are falling as buyers become more sensitive to future value, from disadvantaged assets such as office buildings and retail stores to warehouses and apartments.

“No one is immune” Eddie LaurinCalifornia-based, affordable workforce and mixed-income home developer Strategic Realty Holdings.. “Everyone is repricing.”

Federal Reserve Bank Formally Rising interest rates By Wednesday’s three-quarters point, the second hike in as many months as policymakers try to fight inflation.It puts the Fed’s benchmark rate Between 2.25% and 2.5%..

Green Street Commercial Real Estate Price Index, Current Unleveraged US Real Estate Value Scale, 3.7% decrease in June It has decreased by nearly 5% since March. Total commercial and multi-mortgage borrowing and lending is projected to decrease 18% this year from $ 89.1 billion in 2021 to $ 733 billion. According to the Mortgage Bankers Association..

“Buyers fully understand where rising interest rates are heading and sign contracts, but investors are not sure where the market is heading and lack of confidence in the contract causes buyers to cancel the contract. Is based in Chicago Green stone partner Managing partner Jason St. John said Bisnow on mail. “Many buyers speculate that there may be better deals if we wait for the price to drop and then postpone it.”

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Courtesy of Amanda Davis

Eddie Lorin, Founder of Strategic Realty Holdings

Laurin said he is seeing apartment prices fall 5% to 10% as a result of economic uncertainty and future Fed rate hikes.

“It’s in everyone’s mind right now. There’s a disconnect between buyers and sellers about the value of properties today, and it probably won’t be fixed for months.” Old Capital National Underwriter Paul Peable’s Said. “I told many people to take a break from summer because it couldn’t get any better.”

According to Peable’s, in the deal he was working on, the buyer was away from the $ 100,000 deposit in a $ 40 million apartment deal in Texas. After the June rate hike, buyers demanded a $ 5 million cut from the purchase price, but sellers shut down, according to Peable’s.

Examples of real estate transaction collapse over price uncertainty, rising borrowing costs, and concerns about recession Mounted all summer..

Boston based TA Realty He recently launched his 5MSF industrial portfolio with warehouses in Dallas, Southern California, Baltimore, Chicago and Phoenix, hoping to win over $ 1 billion. Eastdil When CBRE I was marketing my portfolio and received only one offer for $ 800 million. According to sources familiar with the process, he advised TA to bring the product out of the market. Bisnow.

Eastdil and CBRE spokespersons declined to comment. TA staff did not return an email asking for comment.

Maria kingApartment broker and vice president Bull Realty In Atlanta, he said the deal for two apartments had collapsed in the past summer. Among them, rising interest rates have left one buyer away from trading 50 units for $ 12 million.

“The offer may still be $ 10 million,” King said. “The amount of money they had previously borrowed is not the same as the interest rate went up. They are no longer penciling out.”

Rosalie ManansaraFounder of DOT Capital AdvisorInvestment consultants said rising interest rates have increased the number of properties that have to adjust the agreed purchase price. Moreover, the capitalization rate for all property types is rising.

“I think there will be more price adjustments in the market,” said Manansara. “I don’t know how much.”

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Federal Reserve Chairman Jerome Powell will speak at a virtual press conference in March 2021.

People seeking floating rate financing, whether new or purchased, Secured overnight funding rateA measure of the cost at which a bank is charged to borrow overnight cash, secured by Treasury bills. SOFR Mainly have Replaced Libor as a benchmark The rate for determining the interest rate on variable debt.

According to Pensford Financial Predict where the SOFR rate will be in the futureThe one-month SOFR period is expected to rise from 2.32% this month to 2.9% by September 26th. Pensford predicts that the one-month SOFR period will exceed 3% from late October to next summer.

Banks typically charge a percentage premium over SOFR for fluctuating commercial real estate loans, especially construction loans. According to Peable’s, nearly 90% of the mortgages that his company started in the last two years were due to variable debt. This allowed the borrower to acquire cheaper debt, but the floating interest rate was exposed to more volatility and risk.

Interest rate question marks are exacerbated only by high construction costs, which are cooling demand for development funds. ACRES Capital CEO Mark Vogel Said. Last year, the company provided a $ 2.4 billion loan. This year, he expects it to fall to $ 2 billion as it avoids more aggressive trading.

“As builders, we have been influenced by the fact that pricing of construction materials is very difficult,” Vogel said. “Things are moving around, and it’s really hard to undertake a deal in an untamed market.”

ACRES had undertaken a contract for DC area development four months ago, but as the SOFR rate increased, ACRES withdrew from the contract, Vogel said.

“When we lenders look at a transaction, we are thinking of ways to refinance from the transaction,” he said. From a cash flow and valuation perspective, “people can’t realize that these properties are a couple of years away.”

Year of cheap debt Historically supported by low interest rates, it has created a consistent funding environment for many new development projects across the country, but that has changed in the coming months.

“Everything you believed in the last few years isn’t always the case these days,” Vogel said.

According to Laurin, the impact of inflation on commercial rent has historically eased valuation concerns, especially in the apartment sector. However, banks have become more shy to take risks, forcing developers to look for multiple ways to finance their transactions.

According to Laurin, his company, SRH, was in talks with a bank seeking a $ 300 million loan to develop four mixed-income apartment projects in Los Angeles. Banks became nervous as prices went up. Instead, in a rare move by SHR, Laurin brought in two more banks, each funding a portion of the loan.

“It’s too exposed. The lenders are nervous,” he said. “They intend to withdraw and make structured transactions.”

However, some real estate investors see the Fed’s actions as an opportunity for real estate prices to return to Earth.

“We think we’ll be back in the pre-Covid world where the Treasury is 3.[%] Cap rate is 3-4[%].. And that’s fine. You can certainly do pretty well and don’t destroy the asset value on reset. ” Bridge logistics properties CEO Jay Cornforth Said. “This is a healthy fix. The last two years have been incredible … unrealistic.”

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