Rising Interest Rates Trigger Commercial Real Estate Retrading Trend
The Federal Reserve System's interest rate hikes are driving commercial real estate buyers to demand price cuts or abandon deals as borrowing costs surge.
Rising interest rates are causing widespread distress in the U.S. commercial real estate market, leading buyers to engage in retrading by demanding price cuts or threatening to walk away from agreed-upon transactions. This trend intensified following a benchmark rate hike by the Federal Reserve System and signals of further increases, which created significant financing gaps between the signing and closing of contracts.
Recent transactions illustrate the volatility. Eastham Capital secured a $600,000 price reduction on a Midwest apartment property by threatening to abandon the deal, while Medalist Diversified reduced the sale price of a retail property in Greenville, South Carolina, by $100,000 to ensure the transaction closed. Market friction has also led to loan withdrawals, including a bank pulling out of a $45 million construction loan in North Carolina, which required Marcus & Millichap to find a replacement lender.
Broader market data indicates a sharp decline in property values relative to the broader economy. The FTSE Nareit All Equity REITs Index fell more than 8% from late August through October 2, while the S&P 500 gained 1%. Additionally, Trepp reported that the special-servicing rate for commercial mortgage-backed securities reached its highest level since February 2013 in August. While some firms like Northwind Group continue to fund large projects, such as a $208 million office-to-apartment conversion in Brooklyn, the overall environment is slowing development and complicating the refinancing of maturing loans.
