In this insightful video, we delve into the rapid fluctuations in lending rates and their profound effects on commercial property values. With lending rates on the move, we explore how banks are assessing deals, pricing risks, and determining valuations in today’s market.
Join us as we walk you through a powerful spreadsheet tool utilized by our company to create valuations using both the income approach and sales comparison approach. Discover the methodology appraisers employ to develop the cap rate, allowing us to assess the market’s cap rate adjustments in response to changing interest rates and bank practices.
We start by examining recent developments in the lending market, with Jay Powell’s testimony before Congress and the recent 25 basis points increase in the Fed funds rate, taking it to 5.5%. The projection is towards a 5.75% rate, which directly impacts commercial property pricing and loan evaluations.
During a conversation with a lender, we analyze a 40,000 square foot industrial building generating $15 per square foot base rent ($600,000 annually) with capital reserves included. By considering a 25-year amortization and building in the lender’s risk margin on the borrowed funds, we witness how the interest rate impacts the cap rate and overall valuation.
As banks have grown cautious due to the rate run and increasing market risks, they are marking up interest rates by up to 3%, influencing cap rates even further. We explore how this directly affects cash-on-cash return requirements for investors and how valuations are adjusted accordingly.
To better comprehend the impact of these changes on property values and market expectations, we compare valuations from different interest rate environments, highlighting the emergence of a bid-ask gap.
Finally, we emphasize the importance of being proactive in determining property valuations and positioning in this ever-changing market. If you want expert guidance in evaluating your property’s worth and finding the right buyer at the right price, visit our website at mansardcre.com and request a consultation with our experienced team. Subscribe to our channel for more market insights and updates on commercial real estate. Stay informed and stay ahead in today’s dynamic real estate landscape.
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