The pandemic has brought interest rates back to historic lows, and as investors take advantage of the low cost of capital, many are wondering when the party will end. Charles Foschini of Berkadia, however, says investors don’t need to be so focused on interest rates, which should increase next year, but are only a measure of an investment agreement.
“Investors need to focus on the trends that make an asset successful and the operator’s business plans. If an asset is depreciated or poorly designed, or if a market cannot function, or if the operator is undercapitalized, the interest rate is irrelevant, ”said Foschini, senior managing director of banking services Mortgages in Berkadia, Florida, Says GlobeSt.com
There is some uncertainty about where rates are heading. Foschini expects interest rates to stay low until at least next year, but spreads could narrow. “I expect interest rates to stay low in 2022 and if the underlying indices rise as many believe, I think spreads will tighten. In my opinion, spreads have been high throughout of the cycle because the indices have been so low, ”he says.
However, just last week, the Federal Reserve Open Market Committee announced significant changes in monetary policy: a faster reduction in bond purchases and the possibility of up to three rate hikes next year. The reasons for this are concern about inflation, which has been more persistent than the institution had expected, and the improvement in the employment landscape. The question for commercial real estate is how stock combinations will affect the markets.
In terms of transaction activity, the low interest rate environment has helped fuel investor demand, but Foschini says strong fundamentals, especially in the multi-family sector, have prompted more transition activity. “Low interest rates have benefited all asset classes, but the real fuel to the flame in the multi-family space has been the growth in rents,” he adds.
For this reason, if the Fed’s interest rate strategy is changed, Foschini does not expect it to have a significant impact on transaction volumes. “The interest rate is only one component of a financing,” he says. “As long as the leverage is there and trades can be structured to meet the needs of the asset and investor holding period, trades will always proceed at a steady pace.”