Inflation may have been tamed, and interest rates may come down in 2024. This change in outlook could provide opportunities for your business. Please enjoy our quarterly newsletter discussing these themes, their impact on your business, and more.
COMMERCIAL REAL ESTATE NEWS
Navigating Interest Rate Uncertainty
At its December meeting, the Fed held interest rates steady for the third consecutive time. Find out why rates may have turned a corner.
Article courtesy of J.P.Morgan Insights – Full Article Here
2024 Commercial Real Estate Outlook
Multifamily and neighborhood retail remain strong, but commercial real estate faces uncertainty around interest rates.
Article courtesy of Commercial Property Executive – Full Article Here
Mass Appeal
Secondary and tertiary markets attract multifamily housing development for affordability, job opportunities, amenities, space and easy living.
Article courtesy of National Apartment Association – Full Article Here
ECONOMIC DATA
BORROWER EDUCATION
Preparing for Rate Decreases
We may be headed into an interesting economic cycle if we can avoid recession. Inflation has been declining, and the Fed’s most recent projections are for three 25 basis point rate decreases in the next year. Experts believe there may be more. Longer term rates which influence commercial real estate loan rates have already declined approximately 50 basis points in the last month. In addition, real estate values have fallen recently, but are still elevated relative to the past several years. (read more about commercial real estate values here). There are several steps that can be taken to be prepared for lower interest rates and elevated real estate values.
Now is a great time to review your real estate portfolio. The first step would be to review your current loan documents, especially if you are considering refinancing or selling a property. One thing to look for is a prepayment penalty. Financial institutions often require a penalty fee if the loan is paid off within a certain time period from origination. Prepayment penalties often have a structure such as 3, 2, 1, meaning the penalty is 3% of the balance if paid in the first 12 months, 2% of the balance if paid in the second year (second 12 months) and 1% if paid in the third year (third 12 months) after the closing date. A structure of 5, 4, 3, 2, 1 is also common. Understanding the potential prepayment fee will be important when considering your strategy.
Verifying the loan interest rate will also be important. Comparing the current loan rate to the potential new loan rate will be important when assessing a change in financing of the property. You need to determine where rates need to be for your strategy to make sense.
Multifamily real estate values rose incredibly fast starting in 2021 and have declined a bit since mid-2022. Other categories have also had value changes inconsistent with pre-COVID trends. It would make sense to have a clear estimate of current market values for properties to better assess what your possibilities are.
Refinancing with no cash out may make sense if you are looking to lower your payment for the property. As rates come down over the year, a lower rate can lower your payment. It is likely you’ve also been making principal payments on your current loan, which would lower the balance needed on the new loan, lowering the payment further (assuming a new amortization schedule). You’d need to be cognizant of the costs to refinance as well as additional costs such as prepayment penalties, which could add to the balance. Talking to your current lender about modifying the loan to change the rate may be the cheapest solution, as many lenders don’t charge the prepayment penalty under that situation.
Refinancing with cash out can be a great way to have cash available for potential opportunities. If your property’s value has increased relative to when it was purchased, you may be able to take out additional cash. The amount of cash out will be dependent on the new interest rate, the ability of the property to generate cash to cover the new payment, and other factors.
Declining rates and the recent decline in property values may create a buying opportunity. Consider your current sources of cash for downpayment, and the cash that may be available within your portfolio.
AAI Financial would be happy to provide you with a review of your current real estate portfolio and make recommendations as to where you can save on future payments or access cash currently tied up in your properties.
Please contact us to see how we can work together.
RECENTLY FUNDED TRANSACTIONS
Here are examples of opportunities we assisted our clients with last quarter:
- $4,200,000 Medical Office Refinance – Yakima, WA – 63.64% LTV
- $420,000 Eight Unit Multifamily Purchase –Center Line, MI – 73.68% LTV
- $1,099,000 Seven Unit Multifamily Purchase –Yakima, WA – 67.42% LTV
Contact us to learn how we can help you with your commercial property financing.
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