US Commercial Property Deals Face Price Cuts as Rates Jump

Rising bond yields have pushed borrowing costs up faster than buyers planned. With six to twelve months between signing and closing, buyers are asking sellers for discounts and better terms, and distress indicators are climbing.

What do the numbers show?

• Borrowing costs: rose more than 60 basis points on one Midwest apartment deal before the buyer's deposit was due, and the buyer won a $600,000 reduction on a roughly $20 million price, about 3% (our calculation)

• Distress: 11.42% of CMBS mortgages were with special servicers in August, the highest rate since February 2013, according to Trepp

• REITs: the FTSE Nareit All Equity REITs Index fell more than 8% from late August to early October, while the S&P 500 rose about 1%

• Lenders: most still have ample capital, though some are pulling back. One bank exited a $45 million construction loan on a retail center that was more than 90% leased

 

 

Why did rates jump?

Yields began rising in late summer and accelerated after the Federal Reserve raised its benchmark rate by 25 basis points in September and signalled more increases.

What does it mean?

The long gap between signing and closing exposes deals to rate swings. Expect more re-trades, more extensions and more sellers choosing to wait.