{"id":1004643185,"date":"2023-02-01T19:42:40","date_gmt":"2023-02-02T03:42:40","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004643185"},"modified":"2023-02-07T08:54:02","modified_gmt":"2023-02-07T16:54:02","slug":"interest-rate-hike-no-8-cre-adapts","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/interest-rate-hike-no-8-cre-adapts\/","title":{"rendered":"Interest Rate Hike #8: The Impact on CRE"},"content":{"rendered":"
\"Screenshot

Federal Reserve Chair Jerome Powell discusses the latest rate increase at a Feb. 1 press conference. <\/p><\/div>\n

Though the Federal Reserve’s decision Tuesday to raise interest rates is likely to keep financing and investment in a slower lane for some time, the commercial real estate market is beginning to take the higher cost of capital in stride. The Fed’s 25 basis-point increase, the eighth hike since March 2022 is part of a concerted effort to bring inflation down to two percent, and to create more predictable price stability across the economy, according to Fed Chair Jerome Powell.<\/p>\n

At present, the rate’s range is at its highest in 16 years<\/a>, but industry sources say that their short-term and long-term effects have largely been taken into account and priced into commercial real estate finance, investment and development. Still, there have been no remedies to dealmaking and development burdens, and the attitude is still one of anticipation of more stability and an eventual calming of market volatility.<\/p>\n

Pricing predictions<\/h2>\n

Both the widespread foresight and the smaller size of the latest hike in comparison to previous increases motivates the view that it will not, in isolation, alter the availability of capital, particularly regarding investment and development.  As Yardi Matrix <\/strong>vice president Jeff Adler noted, the impact is largely successive rather than a significant influence on current pricing issues, since the market has largely factored in the rate hike. Citing the current Treasury yield rate, Adler told CPE<\/em>, \u201cThis particular increase won\u2019t make a huge difference, with 10-year Treasury Bills currently at 3.5 percent, leading to long-term rates of [around] 5.5 percent.\u201d<\/p>\n

On the flip side, Adler sees inherent cost discrepancies as slowing down<\/a> development and transaction volumes, despite the relative ease of access to capital. \u201cFinancing is available\u2014the issue is the cost, and the impact on project feasibility,” he said. “Fewer projects pencil out, and this increase will have a slight negative impact on that.\u201d<\/p>\n

\n

READ ALSO: <\/strong>Shallow Recession or Global Financial Crisis?<\/span><\/a><\/p>\n

\n

Mark Ritchie, principal at Gantry<\/strong>, concurs with Adler\u2019s assessment of pricing adaptability, but sees capital availability, particularly for acquisitions, as contingent upon leverage. \u201cFor owners with low-leveraged property, the market has a significant number of financing solutions for pending maturities,” he said. “However, higher leveraged assets are and will continue to face headwinds in this higher rate environment. Price discovery is still an ongoing adventure,\u201d<\/p>\n

Direction questions<\/h2>\n
\"Compass\"

Image by AbsolutVision via Pixabay<\/p><\/div>\n

There is a divergence in market observers’ views about where financing costs will go, as well as how they will affect buyer and lender perspectives. Ben Tapper, senior managing director of Lee & Associates NYC, <\/strong>predicts a small increase, in light of ongoing decreases<\/a> in various pricing indexes. \u201cBoth the 5-year and 10-year Treasuries have come down approximately 70 bps since the first week in November, which has helped to lower the cost of capital in some cases,\u201d Tapper noted. Since the market has already priced in the increases, he sees little impact on debt availability. “I believe that the ability to obtain financing will largely remain unchanged after this latest uptick,\u201d he concluded.<\/p>\n

Rob Gilman, co-head of the real estate group at Anchin<\/strong>, offers a contrasting view. \u201cI believe (that) we are going to start seeing more significant price declines,\u201d he predicts. \u201cAny rate increase, even a small 25-point basis bump, will reduce buying power [and] will either trigger more equity needed to close a deal, or prices will decrease to meet the buying power available under higher interest rates.\u201d<\/p>\n

Gilman sees a potentially destabilizing effect on development deals, where declining asset prices could yield higher construction costs and reduced sales value for completed projects. \u201cDepending on how bad the returns become before completion, you can end up walking away before completing a project. Lenders might be left with partially completed projects,\u201d Gilman detailed.<\/p>\n

Ben Kadish, president & founder of Maverick Commercial Mortgage, <\/strong>has observed such effects in real time, with the construction of new developments that have stagnated as a result of value uncertainty. \u201cWith interest expense now consuming a larger portion of the construction budget, new projects require more equity from sponsors and will cost more without adding additional value. If there is no return to the equity, those development deals will not move ahead,\u201d Kadish said. Such a slowdown could potentially have serious consequences for new projects. \u201cUntil rates start coming down in 2024 or 2025, this part of the economy will grind to a halt and construction workers unfortunately will see less work,\u201d he added.<\/p>\n","protected":false},"excerpt":{"rendered":"

What the Fed’s latest increase means for dealmaking and capital availability. <\/p>\n","protected":false},"author":3012,"featured_media":1004643190,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21825,21783,23891,21742,51037],"tags":[51117,35492,32762,50719,32785],"class_list":["post-1004643185","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","category-investment","category-national","category-latest","category-trends","tag-anchin","tag-federal-reserve","tag-lee-associates","tag-maverick-commercial-mortgage","tag-yardi-matrix"],"acf":[],"yoast_head":"\nInterest Rate Hike #8: The Impact on CRE - Commercial Property Executive<\/title>\n<meta name=\"description\" content=\"Following the latest increase, industry experts weighed in with their latest views on the current finance and investment landscape.\" \/>\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\/interest-rate-hike-no-8-cre-adapts\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Interest Rate Hike #8: The Impact on CRE\" \/>\n<meta property=\"og:description\" content=\"Following the latest increase, industry experts weighed in with their latest views on the current finance and investment landscape.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/interest-rate-hike-no-8-cre-adapts\/\" \/>\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=\"2023-02-02T03:42:40+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2023-02-07T16:54:02+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2023\/02\/Screenshot-14-1-e1675291621641.png\" \/>\n\t<meta property=\"og:image:width\" content=\"801\" \/>\n\t<meta property=\"og:image:height\" content=\"621\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Gabriel Frank\" \/>\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\/interest-rate-hike-no-8-cre-adapts\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/interest-rate-hike-no-8-cre-adapts\/\",\"name\":\"Interest Rate Hike #8: The Impact on CRE - 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