RXR CEO Says CRE Faces a ‘New Paradigm’ of Permanently Higher Interest Rates

Much of the commercial real estate industry has been closely watching the Federal Reserve and the promise of interest rate cuts that could bring back easier times in purchasing and refinancing.

But there have been doubts among some experts as to how far rates could fall. Fed Chair Jerome Powell said in congressional testimony in July, “I think we probably won’t go back to that era between the global financial crisis and the pandemic, [when] rates were very low, and inflation was very low.”

Now RXR CEO Scott Rechler, in a conversation with Bloomberg, said that across the CRE spectrum, commercial real estate faces a “new paradigm” of where interest rates will sit.

“We went through this period where we lived in a world where interest rates were near zero or low for a decade plus, which was not normal,” Rechler said. Then came inflation after supply chain problems during the pandemic and large amounts of liquidity hit the investment markets. The Fed drove up interest rates in an attempt to battle price increases.

The increase of baseline interest rates “impacted values of every commercial real estate sector and anything that was financed when interest rates were low and now to be refinanced when interest higher is becoming a challenge,” Rechler said.

Some sectors felt individual effects. For example, there were many multifamily purchases in 2020 and 2021. People expected rates to stay low and rents to rise, the latter because the wild influx of capital drove prices up and cap rates down. Instead, interest rates rose, and rents declined. “A lot of those capital structures are broken,” he said. Adding to the multifamily problem have been record levels of new development in the Sun Belt that are coming online.

While there may be good fundamentals, “it’s going to require ultimately write-downs and, equity injections that need to take place to reset those balance sheets.”

Rather than like the 2000s, Rechler sees the situation as similar to the early 1990s where there will be waves of loans that mature and don’t need recapitalization.

But from the investment view, there are areas in the country where there is too much rental housing and others where there is too little. Even the areas that saw large increases in unit construction will have a drop in supply compounded by construction and financing costs that are still high.

But the next two years you’re going to have a situation where you can actually have entry points to buy multifamily at dislocated prices because they need to recapitalize their broken capital structures today,” says Rechler.

He also said that there isn’t a level of cuts the Fed will offer to save commercial real estate. Instead, the interest rate story will be “higher is the new normal.” Even if the change is 3% to 4% rather than 0% to 2%, “That still is going to require us to recalibrate values, recalibrate capital structures along the way.”

But even an understanding that rates will come down will help increase transactions that will power price discovery.