The news continues to focus on the Fed’s rate increases in an effort to control inflation. This issue focuses on rate hikes and the impact on real estate. Please enjoy our quarterly newsletter addressing these issues and more.
COMMERCIAL REAL ESTATE NEWS
Prepping for the Oncoming Rate Hikes
At the dawn of 2022, the outlook for multifamily real estate looked as bright as in the year just ending. Industry experts released bullish forecasts and a number of loan specialists spoke on the shiny outlook for the sector. The prognosis took a turn when the Federal Reserve set in motion a series of interest rate hikes to taper inflation.Full Article – Yardi
What Interest Rate Hikes Mean for Multifamily Property Investors
Inflation is at 40-year highs, but interest rates aren’t. Find out how rate increases could impact real estate investors.Full Article – JP Morgan Insights
What Rising Interest Rates Mean for Net Lease Investors
A volatile stock market combined with rising interest rates and inflation have yet to disturb capital pouring into net lease properties. The passive income strategy, invariably explained as a bond wrapped in real estate, provides investors with long-term credit tenants that are largely responsible for all of a property’s expenses, including real estate taxes, insurance and maintenance.Full Article – Commercial Property Executive
The capitalization rate, often called the “cap rate,” is used to estimate an investor’s potential return on their investment in the real estate market. The cap rate represents the yield of a property over a one year time horizon assuming the property is purchased with cash.
The capitalization rate of a real estate investment is calculated by dividing the property’s net operating income (NOI) by the current market value. Mathematically,
Capitalization Rate = Net Operating Income / Current Market Value
where the net operating income is the (expected) annual income generated by the property less all the expenses incurred for managing the property. These expenses may include property taxes, insurance and other costs of regular upkeep of the facility.
The current market value of the asset is the present day value of the property as per the prevailing market rates. If purchasing a property, the purchase price can be used in place of market value.
The cap rate is critically important to appraisers. Appraisers will use cap rates when determining value based on the income approach. Appraisers will know the cap rate in the local market for properties similar to the one being appraised. Appraisers will estimate the income of the property based on market factors, apply the market cap rate using the above equation and determine a value.
The cap rate can be used as a comparative tool for real estate investors. For example, if an investor can buy a building with a cap rate of 7.00%, and expects a mutual fund to return 5.00%, the investor may choose to invest in the building because it has a higher expected return. The investor may also choose between two buildings because one has a higher expected cap rate than the other. As interest rates of US Treasury bonds rise, the expected return, or cap rate, on real estate as an alternative investment may also rise.
Currently, even though interest rates are rising, cap rates have not risen due to the demand for properties and real interest rates still being negative. Inflation is higher than interest rates which still makes it prudent to invest in lower cap rate deals.
RECENTLY FUNDED TRANSACTIONS
Here are examples of opportunities we assisted our clients with last quarter:
- $11,279,500 Multifamily Construction – West Richland, WA – 68.5% LTC
- $2,931,000 Investment Property Portfolio Refi – Renton, WA – 69% LTV
- $445,000 Insurance Office SBA 7(a) Purchase – Yakima, WA – 89% LTV
Contact us to learn how we can help you with your commercial property financing.