{"id":1004586206,"date":"2022-06-30T04:42:36","date_gmt":"2022-06-30T12:42:36","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004586206"},"modified":"2022-12-08T14:10:10","modified_gmt":"2022-12-08T22:10:10","slug":"why-cre-investors-are-rethinking-refinancing","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/why-cre-investors-are-rethinking-refinancing\/","title":{"rendered":"Why CRE Investors Are Rethinking Refinancing"},"content":{"rendered":"

Rising interest rates, growing inflation, fear of recession and a war in Europe give commercial property players ample reason to put extra thought into whether and when to refinance their current debt.<\/p>\n\n\n

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READ THE DIGEST<\/a><\/div>\n<\/div>\n\n\n

Last month, the Federal Reserve raised the federal funds rate 75 basis points to a target range of 1.5 percent to 1.75 percent in order to control runaway inflation. Meanwhile, the 10-year Treasury yield had doubled from 1.6 percent at the beginning of the year, and the short-term Secured Overnight Financing Rate had climbed some150 basis points from near zero.<\/p>\n

During the first quarter, investors were eager to refinance in order to take advantage of high valuations and to get in the market before the Fed started hiking its benchmark interest rate to ease inflation. Now, many are hesitant to tap the debt markets because interest rates have risen so rapidly since March, and lender underwriting is reflecting economic uncertainty and increased risk. There is even talk of \u201cnegative leverage\u201d for some properties if the cost of capital is higher than a property\u2019s cap rate.<\/p>\n

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Read Also: What Rising Interest Rates Mean for Net Lease Investors<\/a><\/strong><\/p>\n

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\u201dThe hurry-up concept has passed, as most of our clients are now considering holding or waiting to access the market, thinking there will be an opportunity to see lower yields in the future and spread compression as the market settles,\u201d pointed out John Alascio, vice chairman at Cushman & Wakefield.<\/p>\n

Nipul Patel, head of real estate banking at Wells Fargo, was even more emphatic: \u201cBroad brush, borrowers are waiting till their maturities come up. \u2026 They\u2019re sticking with their current instruments.\u201d<\/p>\n

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Based on independent reports of properties and portfolios $2.5 million and greater. Source: MSCI<\/p><\/div>\n

Mortgage Rates Are Still Low<\/h2>\n

Despite the increase in borrowing costs, interest rates are still historically low and many financing executives believe there\u2019s still time to secure terms that will gird properties and portfolios for whatever lies ahead economically.<\/p>\n

\u201cThe Fed is going to hike rates till it hurts,\u201d said Jay Maddox, principal in capital markets at Avison Young, noting it started raising rates too late and will probably overcorrect the U.S. into recession. The Fed, however, is still hoping to bring inflation back down to 2 percent without tanking the economy. <\/p>\n

Under current circumstances, Maddox advises clients to get the longest-term, fixed-rate loans they can get, and he\u2019s also trying to put his borrowers into balance-sheet loans.<\/p>\n

One of Maddox\u2019s clients, a lower-leveraged owner-developer that currently focuses on NNN, single-tenant leases with investment-grade tenants, is using refinancing as a way to build a war chest to make some opportunistic acquisitions in the office sector.<\/p>\n

Borrowers entering the debt markets for refinancing, however, will find a different environment than earlier this year.<\/p>\n

\u201cMuch of the current market has priced in the projected inflation and rate increases,\u201d Alascio added. \u201cRates are higher across the board, and lenders are more critical of underwriting and rent projections.\u201d<\/p>\n

Proceeds are being constrained as a result of Fitch underwriting models and stressed DSCR standards. And lenders are cutting back on leverage to meet their coverage tests.<\/p>\n

For example, Van Leer noted, a lender that wants to see a 1.3x coverage isn\u2019t offering the same loan amount today as six months ago, if its rate is now 150 basis points wider.<\/p>\n

\u201cAs a result, we\u2019re seeing a trend where debt funds and sub-debt providers are playing a larger role in the capital stack,\u201d he remarked.<\/p>\n

The rate increases make alternative sources of debt no longer contingent on the public markets for leverage or securitization, as well as more competitive and dependable, Alascio added.<\/p>\n

Meanwhile, the rise in rates has created opportunity, according to Van Leer. \u201cPrepayments based on defeasance\/yield maintenance are now cheaper, which gives a borrower more flexibility for exit to sale or refinance ahead of their maturity,\u201d he said.<\/p>\n

JLL arranged a $215 million refi for a 30-property portfolio\u2014retail, medical and traditional office space\u2014for Paramount Realty. \u201cWe locked rate earlier this year, and as we worked towards a closing, Treasuries continued to rise, thus reducing our prepayment penalty,\u201d said Van Leer, noting JLL’s debt transaction volume was up 61 percent in the first quarter of 2022 vs. the first quarter of 2021.<\/p>\n

Defeasance costs on CMBS loans have also come way down, Maddox noted.<\/p>\n

Refinancing for the Remainder of the Year<\/h2>\n

The Fed is forecasting a 3.25 to 3.5 percent fed funds rate by year-end, but it could be higher if necessary, and 10-year Treasury yields will remain around 3 percent, according to Nuveen. <\/p>\n

\u201cContinued recession discussions will put further strain on capital markets\u2019 debt,\u201d he added. \u201cBanks and other providers of debt will be even more conservative.\u201d<\/p>\n

But most lenders are not retreating from the market. Commercial real estate has proven to be a secure investment during inflationary times, and banks are encouraged by consistent and increasing equity investment as well as strong rents, occupancies and overall fundamentals. <\/p>\n

\u201c(Lenders) like the market they\u2019re in,\u201d Van Leer said. \u201cThey have ample liquidity, and they\u2019re able to gain a higher yield at a much lower leverage point.\u201d<\/p>\n

For borrowers, the choice of whether or not to refinance depends mostly on their view of where we are and where we\u2019re headed, Van Leer said: \u201cIf you take the approach that rates are not compressing over the next six to 18 months, and there\u2019s a chance we go into a recession in a couple years, one might pursue a five- or seven-year fixed-rate financing with some flexible prepay option vs. locking in a 10-plus-year loan.”<\/p>\n

Read the July 2022 issue of CPE.<\/em><\/a><\/p>","protected":false},"excerpt":{"rendered":"

Interest rates are still historically low, but lenders and investors are more conservative since the Fed began its aggressive tightening.<\/p>\n","protected":false},"author":882,"featured_media":1004587876,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1521,21825],"tags":[33022,32799,32808,37491,33277],"class_list":["post-1004586206","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-digital","category-finance","tag-avison-young","tag-cushman-wakefield","tag-federal-reserve-bank","tag-nuveen","tag-wells-fargo"],"acf":[],"yoast_head":"\nWhy CRE Investors Are Rethinking Refinancing - Commercial Property Executive<\/title>\n<meta name=\"description\" content=\"Commercial mortgage rates are still historically low, but lenders are taking a more conservative approach to underwriting\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/why-cre-investors-are-rethinking-refinancing\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why CRE Investors Are Rethinking Refinancing\" \/>\n<meta property=\"og:description\" content=\"Commercial mortgage rates are still historically low, but lenders are taking a more conservative approach to underwriting\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/why-cre-investors-are-rethinking-refinancing\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2022-06-30T12:42:36+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-12-08T22:10:10+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2022\/06\/CPE-Finance-iStock-1249214479-Image-by-useng-iStockphoto.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"900\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Scott Baltic\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/why-cre-investors-are-rethinking-refinancing\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/why-cre-investors-are-rethinking-refinancing\/\",\"name\":\"Why CRE Investors Are Rethinking Refinancing - 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