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What’s Happening in Commercial Real Estate

by | Dec 20, 2022 | Blog

What’s Happening in Commercial Real Estate
Over the past few months, the financial turbulence has been undeniable. Monetary Inflation is now a common kitchen table discussion. The Federal Reserve has steadily increased the prime lending interest rate in an effort to curb inflation. Luckily for borrowers, real estate interest rates tend to compress, increasing at less than a 1:1 ratio.

There are still transactions occurring between investors and commercial real estate lenders. Historically, we are actually seeing a normal number of commercial transactions, given that the bank lending rate of 2008-2015 was low for the longest period since 1965 (source: https://fred.stlouisfed.org/series/DPRIME).

Today’s Market

One of the great things about a market like this is the fact that it is less competitive for borrowers. Now, borrowers have the option of selecting which piece of real estate they want and negotiating terms. For example, a responsible borrower could find their desired property, and want to secure it quickly, they could utilize a short-term construction loan. Doing this would allow them the possibility to refinance long-term, which could ultimately lower the price of commercial property mortgage rates.
Today’s Market
Today’s Market

In the future, there is the possibility that the Federal Reserve will try to tame the acceleration of residential interest rates. In other words, this would lower the cost of funds. Right now, these rates have settled into the low 7s and we believe will eventually decrease. At the same time, commercial real estate rates have peaked.

Trends of Rates

If you are a business owner and are presently leasing your property, given the current market conditions, you might have opportunities to buy that space. However, this can vary depending on what sector you are located in. The current leasing market will place you in a better position as a buyer, so it might be a good idea to look into such an investment.

Finding changes in the market and finding a great deal, as an investor or borrower, can vary by location. Areas that are thriving with jobs are typically the same areas that are doing best in the real estate market. This is because there are more opportunities for residential and commercial real estate.

Likewise, we believe the more volatile areas to invest in are in more rural locations, or places that are far from workforce-dense areas. For example, if you are in the Bay Area, it would not make sense to invest in real estate in the foothills of the Sierras. There would be less opportunity to find a reasonable property that also fits your financial goals.

On the other hand, it may be beneficial to look into more rural properties with less competition as there is often more focus on the suburban, high population areas. The competitive properties also come with the possibility of increased leverages as well.

Over the past decade, interest rates have been generally low, and the amount of financing available rather high. Now, we have entered what should be considered a “normal” time. Borrowers may experience higher cap rates, which means slightly lower prices on real estate. However, this should not deter any borrowers from finding the right type of loan.

Finding the right loan is not a one-size-fits-all situation. Alternative lenders or Hard Money Lenders can create loans tailored to borrowers’ specific needs, whether it is new construction loans or rehab loans. While one borrower or investor may be perfect for a fixed-rate bridge loan, another is a great candidate for a long-term fully amortizing loan.. Finding the right loan choice also depends on the type of commercial real estate.

Some lenders, however, are pulling back or even going out of business because they were not Prepared for the market volatility. The lack of financial security has ultimately forced the companies to close their doors, leading to more opportunities with other lenders. In the end, this causes the commercial real estate market to become more competitive.

ReProp’s Principles

At ReProp, our underwriting principles remain the same in an abounding market, and the same goes for a recessionary market. ReProp sticks to their principles, and it is proven in both the company’s and borrower’s success. These principles are moderate leverage – or debt – that our borrowers are able to efficiently sustain for time to come.

Today’s Market
For the last 35 years, ReProp Financial’s goal has been to ensure our investors’ and borrowers’ security throughout their entire journey. Every client is considered when evaluating the uncertainty that comes with a fluctuating market. This principle has been the foundation of ReProp, and it has brought countless success to clients.

As a company, ReProp Financial strives to help borrowers and investors find the win-win, regardless of the status of the market. To see what kind of loan would best suit your commercial real estate goals, contact ReProp Financial and speak to an advisor today.

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