Why CRE Investors Shouldn't Be Too Focused on Interest Rates

The pandemic brought interest rates back down to historic lows, and while investors are enjoying the low cost of capital, many are wondering when the party will end. Berkadia’s Charles Foschini, however, says that investors need not be so focused on interest rates, which are scheduled to rise next year, but are only one metric of an investment deal.

“Investors need to be focused on the trends that make an asset successful and the business plans of the operator.  If an asset is impaired, or otherwise ill-designed, or a market can’t perform, or the operator is under-capitalized, the interest rate isn’t relevant,” Foschini, senior managing director of mortgage banking at Berkadia in Florida, tells GlobeSt.com

There is some uncertainty about where rates are heading. Foschini expects interest rates to stay low at least through next year, but spreads could compress. “I expect interest rates to stay low in 2022 and if the underlying indexes spike as many believe, I believe that spreads will tighten. In my opinion, spreads have been fat this entire cycle because the indexes have been so low,” he says.

However, just last week, The Federal Reserve Open Market Committee announced some significant changes in monetary policy: a faster tapering of bond purchases and the possibility of as many as three rate hikes next year. The reasons are concern about inflation, which has been more dogged than the institution had expected, and an improved job landscape. The question for commercial real estate is how the combinations of actions will affect markets.

In terms of deal activity the low interest rate environment has help fuel investor demand, but Foschini says that strong fundamentals, particularly in the multifamily sector have incentivized more transition activity. “Low interest rates have benefitted all the asset classes, but the real accelerant to the flame in the multifamily space has been rent growth,” he adds.

For that reason, if changed do come to the Fed’s interest rate strategy, Foschini doesn’t expect it to have a meaningful impact on transaction volumes. “Interest rate is just one component of a financing,” he says. “So long as leverage is there, and deals can be structured to suit the needs of the asset and the investors hold period, transactions will still occur at a brisk pace.”