The Interest-Rate Guessing Game

Before distressed assets came along, few people could find much to complain about with respect to low interest rates. But a funny thing has happened in the sometimes topsy-turvy world of distressed properties: low rates, combined with bank policies that extend loans on distressed assets, are allowing these underperforming properties to stay a float because the debt service is so low.

Whether this situation is ultimately good or bad for the industry remains for history and analysts to determine. In the meantime, however, experts say that the low interest-rate environment is helping to keep at least some distressed deals off the market. Guy Johnson, president of Irvine, CA based Johnson Capital, says that low interest rates have stifled transaction volume in properties that may not be worth the debt. “So some of that supply has not been forced to market,” he says. “When the banks extend debt at anything off of Libor it certainly helps troubled transactions to maintain cash-flow even if they have bad loan-to-value ratios.”