The market for commercial and multifamily investment properties embarked on a tumultuous journey when the Federal Open Markets Committee (FOMC) began raising rates last March. Since that time, the benchmark fed funds rate is now 525 bps higher, which has come with severe consequences, both intended and unintended.  First, we saw a wave of bond devaluations come into focus as financial institutions wrestled with marking those, now liabilities, to market.  That was immediately followed by several high-profile, and many less visible, regional bank failures. The rapid rise in interest rates has also caused property values to fall, in some cases dramatically, and a subsequent repricing of almost all CRE asset classes. The average investment property value has slid by about 25% due to this higher cost of capital.

Even though values are down, most properties are still generating sufficient revenue to fund operating costs and service the current debt. For at least the moment. Yet when these pre-pandemic era loans begin to mature and investors are forced back into the debt markets, the picture becomes much more concerning. Properties that face the highest risk of repayment default were purchased at ultra-low cap rates between 2014 – 2019. Further complicating matters is that many of those properties were acquired using floating rate debt without any interest rate protection. Whether floating or refinancing, higher borrowing costs and tighter credit conditions have and will continue making it extremely difficult for investors during these uncertain times.

While not all CRE is on the brink of default, according to the Mortgage Bankers Association there is a total of $4.5 trillion in loans outstanding today. And with the mixed inflation data, we don’t anticipate the rate environment changing anytime soon. At Boston Realty Advisors, our goal is to help borrowers find solutions by proactively planning. We work with various capital sources from across the country to identify the best outcome. Markets are cyclical and CRE will recover. Let us help you get there.