Rising interest rates reopen negotiations on commercial deals

For an industry as sensitive to interest rates as commercial real estate, last month’s Federal Reserve rate hike did pending and prospective deals no favors.

Buyers are increasingly seeking retrades for transactions already in the works, the Wall Street Journal reported, a trend spurred on by the summer’s rise in bond yields and September’s benchmark interest rate hike. Hopes for falling interest rates earlier this year have given way to the opposite reality.

That’s left sellers with tough decisions: make concessions or lose a deal.

“We are working harder to close deals now than we ever have before,” Bobby Werhane, a managing director of Marcus & Millichap’s IPA Capital Markets division, told the Journal.

“There’s just much more friction in the market,” Werhane added.

Part of the problem is the lengthy timeline for commercial real estate deals. Even after a deal is reached, it can take up to a year for it to actually close, meaning buyers looking at interest rates in April could be facing a very different lending environment today.

Compounding the problem is commercial real estate’s heavy reliance on debt to finance deals and developments. More than $5 trillion in commercial and multifamily mortgages alone are outstanding today.

Deals across property types are on shaky ground. A buyer of a Midwest multifamily building negotiated a $600,000 discount on a $20 million deal after threatening to walk away in the face of rising borrowing costs. A $10.2 million deal for a retail property in South Carolina nearly fell apart before a six-figure price reduction.

Buyers wishing for a silver lining can look towards the debt and equity investors still raising cash quicker than the market can respond on the dealmaking side, leading to increased competition and the possibility of better terms shaking out.

But last month’s interest rate hike came with a warning borne out by the economic data: more rate increases could be coming down the line.

— Holden Walter-Warner