We don’t want to name names of other colleagues in the industry but we know at least 4 (billion dollar assets owned firms) that are in the same predicament on the projects that were secured between 2021-2022 with floating rate debt. These firms we are citing are not in the headlines but also own significant portfolios that will inevitably flood the market. This is why we are taking a pessimistic approach to the market in the short term.

Additionally the Fed at the September meeting chose to pause rate hikes and will likely do one in November. Which only exacerbates how long those will need to hold on. There is a tidal wave of mortgages up for renewal ($436B) and we feel at this point it is best to get ahead of it before it craters that market even more.

For those who are unaware of floating rate debt, even with a rate cap in place you can expect your mortgage payments to increase 50% to well over 2-3X. This makes getting to cashflow neutrality impossible… even if you were over 110% occupied and pushed rents to 15-40% above prior levels in some instances. Simply put… NOI increases cannot overcome the monthly mortgages. The monthly payments just can’t be penciled out. Hence the need to “Rate Cap” placement to bring down mortgage rates to passable levels and this takes capital… and a lot of it (in the seven figures range). Or refinance into permanent debt – again a viable solution but requires even more investor capital in order to meet lower LTV requirements. It’s a conundrum facing all in the commercial RE sector.

Question on everyones mind “when will rates fall and at what speed” [which is very different from a year ago which was “how high will rates go up]

What now?

In the face of the recent upheavals in the commercial real estate sector, it’s easy to be swayed by the prevailing pessimism – example comment thread of fear monger blogs which tend to have low net worth readers not real investors. The rapid increases in interest rates, the subsequent drop in buyer activity, and the myriad challenges faced by the commercial real estate and multifamily sectors paint a daunting picture. The headlines of 2023 alone are a testament to the turbulence experienced by even the most established players in the industry. The current scenario underscores the importance of strategic financial planning, especially in terms of choosing between fixed and floating rate debts. While the repercussions of floating rate debts have been starkly evident, it also brings to light the importance of having a diversified portfolio that spans 4-7 years meaning that you might need to start now to establish that.

It’s crucial to remember that every challenge also presents an opportunity. The current market conditions, while testing, are also a litmus test that distinguishes the retail investors from the sophisticated ones. While the former may be swayed by the prevailing doom and gloom, the latter sees the potential for strategic capital placement.

The market’s short-term pessimism can be that “cover of night” for those with a long-term vision. With properties being undervalued and a flood of assets potentially hitting the market, there lies a golden opportunity for savvy investors to acquire assets at a discount. That said where current Loan to Values are at with loans I can’t make deals work (as of June 2022 we have not done much as far as new acquisitions) even with 20%+ discounts in the market. The key is to have the foresight to look beyond the immediate challenges and recognize the potential for future gains and this might mean focusing on building your AIB or opportunities to save tax.

Focus on the opportunities that such challenges present – this might even be outside of real estate or other hard asset classes. Remember, it’s the strategic placement of capital, especially in times of uncertainty, that separates the guy who is going to stay where they are at with 5% in a savings account than those quietly building the foundation to launch themself into 8-figures in the next decade. Don’t be swayed by short-term challenges. Instead, let’s seize the opportunities that lie ahead, for it’s in times like these that the most astute investments are made. As Warren Buffett says, “be greedy only when others are fearful!”

Drivers Behind the 2024 Recession
https://www.youtube.com/watch?v=yySJGqsIKUg

1. A mild recession in 2024 expected
2. Personal savings declined to 2020 (still above 2019 levels)
3. Capex / Exports (4 months lead time)
4. Capex / Corp Bond yields (22 mo lead time) show weakening in 2024 and over
5. Capex / Corporate profits (9 months lead time to Capex) is lowering