How the Fed’s Latest Interest Rate Hike Will Impact the CRE Market

Experts say the cost of financing will keep rising to unprecedented levels.

The benchmark interest rate set by the Federal Reserve has increased by 75 basis points for a second consecutive month. The goal range for overnight interbank lending is 2.25 percent to 2.5 percent, and as it rises, so do many other interest rates, including those that commercial real estate companies will have to pay to get credit.
According to Kevin Fagan, head of CRE economic analysis at Moody’s Analytics, “The Fed announcement of hiking their target Fed funds rate by 75 basis points was highly expected.” The majority of market participants in commercial real estate are likely to have anticipated this, especially lenders as they have seen loan interest rates climb by more than 50 basis points in 2022, primarily in the second quarter. As a result, asset values are under pressure, and lender profits and borrower returns are constrained. Therefore, [as the industry evaluates the near-term future], [we predict] both loan issuance and commercial real estate sales volume to decline in Q2.

The Federal Open Market Committee of the Federal Reserve, which is tasked with containing both inflation and unemployment, justified its actions by highlighting recent steady job growth, high inflation, widespread pricing pressures, and Russia’s ongoing invasion of Ukraine.


Stephen Bittel, founder and chairman of Terranova Corporation, says there is a clear gap between expectations of buyers and sellers in our current investment climate. “..sellers seek the price attainable last year, while buyers expect a discount because of a higher cost of debt capital,” says Bittel. He adds, “Development deals that were already contending with higher construction costs are now also hurt by a higher cost of debt, coupled with an expectation of a higher equity yield.”

Commercial real estate is already feeling the effects. According to Adil Hasan, director of real estate at Yieldstreet, “The CRE market has seen a significant slowdown in transaction volume over the last couple months and the trend is expected to continue until there are signs of stability from the Fed.” Hasan notes that, “The inability of CRE investors to determine market value of assets primarily due to uncertainty around debt capital markets will keep many investors on the sidelines.” He also argues that the,  “…rising cost of debt will hurt cash flow for properties that have floating rate debt, forcing many property owners to be forced sellers.”
Investors who made real estate purchases three years ago and are trying to roll over financing are getting one-year extensions from their lenders, according to Bill Doyle, co-founder and managing director at Equity Oak Ventures. Due to a significant decrease in appraiser valuation, he says,  “All forms of lenders, especially debt funds, are in need to rebalance those notes.” The continuing rate increases only put more pressure on the need to rebalance mortgages.  Experts note that in the debt market, the next 90-120 days will determine whether existing mortgages will need to be extended, refinanced,or ultimately handed back to lenders.
Some, however, do stand to benefit from the current state of the lending market.  Hasan points out that, “This could present some attractive acquisition opportunities for investors that have the capital available.”
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.

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