Rising interest rates are at the core of many commercial real estate (CRE) conversations today. As the Fed prepares to meet again this month, there is speculation that interest rates will rise another 75 basis points. Until the Fed discontinues its increase in the treasury, there will continue to be discussion around the ongoing impacts across the real estate market.
Thirty Capital Financial CEO, Kevin Swill, had the opportunity to lead a panel at last week’s IMN Mid-Market Multifamily Forum (West) conference. Their discussion was about The Refi Market in Commercial Real Estate. During the session, Kevin posed several thought-provoking questions about the current refi market, receiving overwhelmingly different responses from each co-panelist.
Read ahead for a recap of their insights and experiences shared during the session.
Question 1: The refinance market’s landscape has changed over the past two years. How will your plans change in relation to this shift?
Today, the commercial real estate market is experiencing volatility due to rising inflation, widening cap rates, increasing supply chain shortages and pricing, and other factors. Aspects such as these have contributed to the market’s unpredictability and created additional risks for commercial real estate firms. The panelists’ responses regarding their future plans were unanimous: until the market cools, new asset acquisition is not in the cards.
Question 2: How do current shifts in the refi landscape impact your fix to floating rate decisions?
Floating interest rate caps prices have skyrocketed due to the ongoing aggressive Fed rate hikes. The Fed increased interest rates by 75 basis points during their last two meetings. These increases have put a damper on floating-rate commercial real estate lending activity and placed increasing pressure on already-rising floating interest rates. As a result, some financing costs have become prohibitive.
One panelist shared that they historically used debt fund variable bridge loans for 3 and 4 year value-add holds. However, today they use fixed debt financing to protect themselves from the rising interest rates. Similarly, many borrowers are moving towards short-term fixed rate loans to minimize costs and avoid the need for interest rate caps.
Question 3: Are you considering springing interest rate caps?
The discussion then turned to springing interest rate caps, with mixed responses from the panelists. Some of the panelists still use floating rate loans and have no choice but to pay for interest rate caps. On the other hand, one panelist shared that they plan to purchase a 1-year cap. During the 1-year period, they are escrowing money to satisfy not having an interest rate cap for the last two years (or to cover additional unanticipated costs).
Note: Thirty Capital Financial has been busy with springing interest rate caps and 1- and 2-year caps as interest rate cap prices decrease. Schedule a meeting with one of our experts to review your loan portfolio.
Question 4: How are you evaluating prepayment penalties? Do they prevent you from reselling or financing?
Some loan documents may subject the borrower to prepayment penalties (i.e. a defeasance). Kevin asked the panelists how they determine whether it makes sense to sell or hold an asset. The panel was divided with some saying yes to a sell through assumption. Others have decided to pay the defeasance penalty and get out of the loan altogether due to market conditions.
Note: Since 2001, Thirty Capital Financial has helped clients Defease With Ease and can assist with Yield Maintenance Calculations as well. Schedule a consultation with a defeasance expert today.
Question 5: How do you plan to navigate underwritten exit cap rates or refinance rates when bridge debt comes due in the next 2 or 3 years?
One panelist researched the correlation between increases in the treasury rate and its historical impact on multifamily cap rates. The conclusion was that when bridge debt is due, the panelists will most likely opt for fixed rate loans on their refinancing.
Bonus Question: How Can Thirty Capital Financial Help In the Current Refi Market?
Thirty Capital Financial can help you understand, analyze, and execute every part of your portfolio. Our experts can help you make informed decisions concerning what you can and should do to drive success in your real estate portfolio.