🌪️ Current Market Conditions Flashcards
What’s the cause of the current commercial real estate crisis?
A combination of decades of growth from low interest rates and easy credit… Office and retail property’s have been massively devalued after covid brought lower occupancy rates and changes in how people work and shop.
The most rapid increase of interest rates in 40 years has affected the CRE market as well. A rise of 0.08% to 5.33% from january 2022 to now.
Over 1.5 Trillion in mortgages will come due in the next 2 years which is a potential time bomb as higher interest rates lower property values. This could create difficulties for refinancing in the current interest rate environment and risk averse lenders MEANING property owners will be forces to sell instead of refinance and most likely sell at a steep discount due to the right lending conditions for investors and risk averse sentiment in the economic environment.
As far as multifamily properties investment volume has fallen over 74% percent compared to 2022 which is the largest year over year decline since the 77% yoy decline of the 2008 financial crash. Mainly due to the rise of interest rates
Cost of ownership VS renting
The average cost of a house payment in Q3 of 2022 was 57% more expensive than the average monthly apartment rent… The widest gap on record. Which before the pandemic averaged just 8.5%.
So even if home values continue to fall and mortgage interest rates drop next year the relatively lower cost of renting will support multifamily demand.
How has the dramatic rise in interest rates affected commercial real estate property values?
- INCREASED BORROWING COSTS - Higher interest rates make it more expensive to borrow money which lowers the potential returns for investors… So sellers have to adjust their price to compensate for that… In general when interest rates rise it results in lower market values or slower growth.
- DECREASED DEMAND - as interest rates rise, borrowing costs increase, impacting cash flow and financial performance of CRE investments.
- IMPACT ON NOI - During a recession, many cre properties can experience decreasing occupancy and late payments which results in a lower NOI and thus a lower appraised value.
Where is the majority of the market investing and seeing growth for multifamily?
Class A occupancy has seen a 70% growth since 2019 as well as the asking rents which has increased by 20%.
Investors are moving towards more stable Class A cre investments to find stability in this seemingly unstable market.
In summary what have you concluded about the current commercial real estate market and how it benefits you?
There’s been a dramatic increase in interest rates over the past 2 years and its likely to increase further… Which has in turn made it more expensive for people to buy homes and made it more attractive to rent… And on the investment side its made created stagnation to lend and to purchase “riskier”, “ value add” investments and go for more Class A stable investments… which is good for you because you have the means and strategy to make a lot of money off of Class B and C properties that aren’t desirable to most in the market right now… This will give you the upper hand, as well as your means to get them their price guaranteed and close within a week from appraisal with cash out. Win-win for all involved.
