A growing number of commercial real-estate buyers are threatening to walk away from recent transactions unless the seller offers better terms.
Because debt was costing less and yields on competing investments such as bonds were dropping, making commercial real estate more attractive, property values were increasing. Eastham Capital agreed to pay about $20 million for a roughly 200-unit apartment property in the Midwest. Rosenthal was able to convince the seller to cut the price by $600,000, after threatening to walk away.
Before it put down a deposit, borrowing costs jumped by more than six-tenths of a percentage point, said Matt Rosenthal, the Boca Raton, Fla.-based firm’s founder and managing director. “It’s certainly a different deal now,” he said. “We are working harder to close deals now than we ever have before,” said Bobby Werhane, a managing director of Marcus & Millichap’s IPA Capital Markets division. “The hurdle is simply higher,” said Alfonso Munk, co-head of investment management at Houston-based Hines, one of the country’s largest developers.
Earlier this year, commercial real-estate investors were expecting the Fed to cut rates.
From late August, when rates began rising more sharply, through Friday, the FTSE Nareit All Equity REITs Index fell more than 8%, while the S&P 500 gained 1%, according to real-estate analytics firm Green Street. Data firm Trepp reported that in August, 11.42% of mortgages packaged into commercial mortgage-backed securities were being handled by special servicers, a sign that those loans were facing problems such as missed payments or difficulty refinancing at maturity. That is the highest special-servicing rate since February 2013.
Now the mood has soured as rising rates have driven values down. One bright spot is that lenders and investment funds still have ample capital to put to work. Debt and equity investors have raised money faster than the market has produced deals, intensifying competition among lenders for the strongest projects.
