- Buyers that signed contracts earlier this year are demanding price cuts or better terms before closing, after bond yields rose in late summer and the Fed hiked rates last month.
- In one example, Eastham Capital won a $600K price cut on a roughly $20M Midwest apartment deal after financing costs jumped more than 0.6 percentage points.
- CMBS special servicing reached 11.42% in August per Trepp, and lenders still have ample capital, so competition for the strongest deals persists even as friction rises.
A growing number of commercial real estate buyers are retrading deals as rapidly rising interest rates erode the returns they underwrote, according to The Wall Street Journal. Investors that agreed to prices earlier this year when financing was cheaper are asking for discounts or concessions before closing.
The pushback began when bond yields started climbing in late summer and intensified after the Federal Reserve raised rates by a quarter point last month.
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Why Timing Matters
Deals typically take six to 12 months between contract and closing, so a sharp move in borrowing costs can change the math quickly. Cushman & Wakefield’s Jeff Powers said he started getting retrade calls within days of the Fed move.
Marcus & Millichap’s Bobby Werhane said closing deals now takes more work than ever.
Rates began to climb in late summer, and the Fed’s quarter-point hike last month accelerated the renegotiations.
Retrades in Practice
Eastham Capital agreed to pay about $20M for a roughly 200-unit Midwest apartment property. Borrowing costs rose more than six-tenths of a point before it posted a deposit, and the seller cut the price by $600K after the buyer threatened to walk.
Medalist Diversified cut $100K from a roughly $10.2M price on a 65K SF Greenville, S.C., retail property, closing in September. A bank also exited a $45M construction loan on a more than 90%-leased North Carolina retail center, and Marcus & Millichap found a replacement lender.
Distress Signals
Trepp reported that 11.42% of CMBS loans were with special servicers in August, the highest rate since February 2013, as owners struggle to refinance maturing loans. That backdrop echoes the special servicing climb CRE Daily has tracked in the office sector.
Green Street data cited by the Journal show the FTSE Nareit All Equity REITs Index down more than 8% since late August, while the S&P 500 gained 1%.
Why It Matters
More than $5T of commercial and multifamily mortgages are outstanding, and the sector had been enjoying a recovery built on limited new supply and stable rates. Falling values also squeeze property and transfer tax collections and raise return hurdles for developers, which cuts demand for construction labor and materials.
Hines’ Alfonso Munk said the development hurdle is simply higher.
What’s Next
Capital is still available. Northwind Group provided a $208M first mortgage to convert much of a 355K SF Brooklyn office tower to apartments, and founder Ran Eliasaf said banks and private lenders competed for it. Expect more of that tension: ample liquidity for top assets, tougher negotiation everywhere else.
Debt and equity investors have raised capital faster than the market has produced deals, which keeps lenders competing for the strongest projects. The Fed also signaled that more increases could follow, so the retrade pressure is unlikely to fade soon.
