John Oharenko
Chicago, IL – As inflation sits at a 40-year high, the Fed raised rates by a quarter point in July, reaching levels last seen in 2001.
This rate hike is the 11th increase in 17
months, representing as much as 5.5%. The Fed’s decision tames inflation
to the mid-three-percent range from a four-decade high of over 9% last year.
Real Estate Capital Institute’s® director John
Oharenko believes, “Later this year, many more investors, including lenders
and equity capital sources, will reprice assets and bring deals to the market
based lower prices not seen in many years.
"Attractive buying opportunities, or
painful dispositions will soon characterize the investment horizon.”
Furthermore, the Fed hinted that another rate hike is possible, as the two-percent annual inflation target remains a priority. However, the side effect includes a rising number of defaults and repricing of the CRE sector, as noted by the following capital market trends:
Limited Risk Appetite: With investors witnessing attractive rising rates for shorter-term and lower-risk investments (e.g., treasuries), many will stay on the sidelines and avoid funding real estate projects not properly positioned to reflect mortgage market conditions and new higher-yield realities. For instance, multifamily cap rates average about 5%, while debt costs start at least 100 to 150 basis points higher.
Defaults: Unless the Fed takes drastic actions to lower interest rates or favorable supply/demand fundamentals emerge in the CRE industry, projects not matching lender and investor pricing expectations will lead to funding problems. In particular, the office properties suffering declining demand and highly leveraged assets for all property types are the first victims succumbing to loan defaults.
The Real Estate Capital Institute® is a volunteer-based research organization that tracks realty rates data for debt and equity yields.
CONTACT:
John Oharenko
Executive Director
director@reci.com / www.reci.com
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