In this video, Jeremy Cyrier, CCIM President and Commercial Real Estate expert dives into the potential impact of increasing interest rates on commercial real estate values. With recent news of Jerome Powell’s plans to raise interest rates again in 2023, many are curious about the consequences for the market.

Starting with the inflation rate, which currently stands at 4% year over year, it has fallen but not enough to satisfy the Federal Reserve. Instead of stabilizing rates, they are signaling that we can expect further increases throughout the year.

So how does this affect commercial real estate? Well, as lending rates rise, the cost of borrowing capital for investing in commercial properties becomes more expensive. Consequently, investors or buyers have to pay less for properties to achieve desired returns that align with risk-adjusted financial goals.

A recent senior loan officer survey conducted in April 2023 highlighted that banks are tightening credit for commercial real estate lending. They are lowering loan-to-value requirements and increasing spreads over the cost of borrowed funds. This means that borrowers will face more stringent criteria and higher interest rates.
For example, in a normal market environment, a bank in the Boston area might borrow money from the Federal Home Loan Bank at 4.2% and add a markup of 1.6% to 2.2% to arrive at a competitive lending rate. However, due to the changing lending landscape, banks now request lower loan-to-value ratios and are quoting interest rates in the range of 8% to 10%.
Consequently, illiquidity is expected to enter the market, leading to a slowdown in transaction velocity throughout 2023. Obtaining borrowed funds will become more challenging, causing sales to take longer and introducing lag and drag to the market. However, buyers with access to cash and capital will have opportunities to capitalize on these market conditions.

If you are planning to sell your commercial property, it is crucial to include current lending assumptions in your underwriting. The lending environment is evolving rapidly, and relying on past lending assumptions can lead to unrealistic expectations. Additionally, it’s important to find buyers with preexisting banking relationships, as many banks now prioritize borrowers they have already worked with.
Stay informed about the rapidly changing landscape of the commercial real estate market. If you have any questions or would like to request a consultation, visit our website at mansardcre.com. Simply click on the “Request Consultation” button in the top right corner to contact us. Our experts will be happy to address your concerns and provide the information you need to make informed commercial real estate decisions.

Video Links:
https://www.federalreserve.gov/data/sloos/sloos-202304.htm

https://www.fhlbboston.com/fhlbank-boston/rates#/long-term

https://www.federalreserve.gov/newsevents/testimony/powell20230621a.htm

https://www.nytimes.com/2023/06/21/business/economy/powell-inflation-federal-reserve.html

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