Real Estate

High interest rates are forcing big-time investors to cut their losses — is a bust coming?

The sudden rise in interest rates has left many veterans reeling. Commercial real estate The owners are gasping for air. It’s a tsunami of woe for landlords who own office and retail space and never saw it coming—and it threatens the country’s entire real estate ecosystem.

Not only have mortgage interest rates skyrocketed, with no sign of easing, but Remote work And e-commerce means former tenants have vacated buildings with no sign of returning. Big cities like New York Is Especially struck tough

“You Verbatim There are trillions of dollars of investments that have suddenly gone massively bad,” said Dan Zorn, chief executive of New York-based asset manager and real estate investor Arena Investors. The Wall Street Journal. “People took these office buildings for granted because, of course, It’s going 98% to be leased in perpetuity.

Property owners are living on borrowed time.

According to a real estate consulting firm ColliersU.S. commercial building vacancy rates were On 17% by the fourth quarter of 2023, higher than during the 2008 financial crisis. and so Stopping court proceedings. The remaining tenants with existing rents are on hold, allowing the buildings to remain afloat.

However, without fully rented buildings, limping along With Borrowing time means maintenance problems will increase, and it’s hard to find insurance on a nearly insolvent building. Many landowners who can do See the writing on the wall Decide to cut your losses.. gave The New York Times Many commercial buildings reported Across the country are Being sold 50% to 80% off.

As the trend continues, it’s not just commercial landlords of skyscrapers who are feeling the pinch. Landlords and businesses in big cities are suffering from the displacement of workers, and municipal budgets that rely on taxes associated with valuable commercial properties face a reduction as lower property tax assessments reduce revenue. Occurs.

How vacant offices affect cities and small residential landlords.

When people no longer need to live in cities to work, the entire infrastructure of that city suffers, including the small landowners who provide housing. Although a lack of inventory and high interest rates have forced people to rent rather than buy, it is not surprising that too big Movement away from expensive northern cities since the pandemic.

New York City is the worst hit, according to census data. 78,000 people are leaving in 2023.. In total, 102,000 people died in New York State. Most of the people who left New York were not millionaires but rather lower and middle class, earning between $32,000 and $65,000, who did not need it. Be tied In an expensive city, they were happy to give up the high rent and cold weather.

How Vacant Offices Can Affect Banks and Loans for Other Small Investors

According to Moody’s Analyticsthe national office vacancy rate reached. A record 19.6% in the fourth quarter of 2023. Not since then. 1979 The offices were so empty.

If landlords sell or sell for less than what they are owed, this can cause big problems for banks that have a lot of commercial real estate debt. Aftershocks could be felt across the region. the whole The lending industry affects small landlords seeking real estate loans.

“We saw this play out last year: A bank gets in trouble, and that creates uncertainty in the market,” said Dan Rocato, a clinical professor of finance at the University of San Diego. CBS. “That uncertainty spills over into the stock market, that uncertainty spills over into the real estate market, and that uncertainty then shows up in your 401(k) plan at the end of the month.”

The result could be that cities looking to make up for the loss of tax revenue by selling distressed and discounted commercial buildings could raise revenue from residential property or sales taxes.

The waiting game gets harder.

“Live to 25” is not a phrase that any landlord struggling with high interest rates would have expected to hear at the beginning of the year when the Fed first A series of rate cuts. however, InflationIts tight grip on the U.S. economy and Fed Chairman Jerome Powell’s steadfast refusal to cut rates have investors, homeowners and many politicians reeling. Their hands are twitching in despair.

As we have seen with distressed commercial real estate sales and syndications with floating rates. mortgage, holding on to underwater debt has become increasingly difficult. Banks are also feeling the heat, which is expected to lead to a deleveraging. To be paid. On average, commercial real estate loans account for more than one-fifth of the total loan portfolio of US banks. Many commercial landlords use borrowed cash to extend their loans until rates are low.

According to the CRED iQ analysis, New York landlords SL Green and Varnado had to look around $100 million for expansion A $1.08 billion loan on an office building at 280 Park Avenue In April. Other owners have decided that they can no longer afford to continue servicing the debt and would be better off investing their money elsewhere. This This is what happened in the 2008 financial crash. Waiting in vain has its limits.

“Last year, borrowers were saying, ‘I only need three months for the rate to drop,'” said Alex Kilic, managing director of real estate services company CWCapital Asset Management. The Wall Street Journal. “We’re not hearing that anymore. Powell seemed pretty clear that this is the new normal.

Final thoughts

Letting properties is always the last option for investors when financial pressures become unbearable. What frustrates many commercial property owners is that the Fed has teased rate cuts Then step back. They inevitably will, but the most important question is when?

Meanwhile, the ropes connecting commercial buildings, lenders, owners, and an entire real estate infrastructure are beginning to threaten businesses, livelihoods, and cities.

Although no one saw the pandemic coming, the aftershocks should better prepare politicians and landlords to deal with other black swan events. At the root of this are interest rates, which fuel rising inflation due to the Fed’s easy money policy.

Other countries Without inflation and rate hikes, the U.S. has recovered from the pandemic more quickly. Lessons should be learned..

In the meantime, Jerome Powell needs to offer the nation some hope. It is not enough for landlords to cite solid economic data that they are about to lose their buildings and residents’ homes.

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Note via BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.


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