Interest Rates

Six Critical Questions Part 3: Will We See an Avalanche of Distressed Assets in 2024? 

This article is part three of a six-part series focusing on the six most critical questions about development and commercial property in Southwest Florida.  Across the country, borrowers and lenders are bracing for a potential surge of distressed assets. According to a study by Cushman & Wakefield, the U.S. commercial property market exhibited an alarming $80 billion in outstanding distress as of Q3 2023. Even more concerning, the report showed more than $215 billion in potential distress on the horizon, surpassing the cumulative distress observed during the Great Recession.  However, Southwest Florida has been able to buck a number of national trends in commercial real estate over the last few years. This brings us to the third question in our series:  Will Southwest Florida See an Avalanche of Distressed Assets in 2024?  To understand the reasons why borrowers and lenders are concerned about distressed assets, it’s important to first understand how commercial loan interest rates contribute to distress levels.  Interest Rates and Distressed Assets  Commercial real estate loans are typically structured with short maturities, often in the neighborhood of eight to ten years, with a much longer amortization period. Consequently, property owners face a large balloon payment at the end of each loan.  If owners are unable to settle these balloon payments in full, they will refinance that balloon payment at current interest rates.   When the majority of existing commercial loans were established, historically low interest rates were in effect. Eight years ago, the average 10-year treasury yield was an astonishing 1.84 percent. Now, with rates more than double that, the cost of refinancing a commercial property balloon payment may not be worth the added cost of borrowing money. This is particularly true in markets where inventory is high and property values are declining.  Distressed Property in Southwest Florida  Here in Southwest Florida, we are experiencing some of the lowest levels of distressed commercial real estate in the state. Our area boasts a loan loss rate of only 11%, which falls below the state average of 12%. Southwest Florida’s resilience comes in part from our strong rental rates, which are helping to keep many properties profitable and net operating income (NOI) positive.  Will distress levels rise in Southwest Florida?  Most likely, although not to the potentially catastrophic levels we may see in other parts of the country. Maturing loans will exert pressure across all product types, especially middle and low-quality office assets. However, rent growth has lifted NOI considerably over the life of the average loan, meaning we shouldn’t anticipate an avalanche of distress. Southwest Florida borrowers who secured financing prior to 2019 have likely accumulated enough appreciation to make their property’s current values higher than their debt balance. Coupled with low vacancy rates, strong job growth, and favorable net migration, our region will likely outperform most of the rest of the country.      Are you a commercial property owner with a loan on the cusp of maturity? If so, the Commercial Property Experts  at Cushman & Wakefield | Commercial Property Southwest Florida (CPSWFL) can help you determine your best next move in our current economic climate. CPSWFL has the data, analytics, and local experience to help you understand the dynamics of our region’s economic potential and commercial property landscape. Complete our online contact form or call us at 239-489-3600 to speak with an expert.     

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Six Critical Questions Part 2: What Impact Will Interest Rates Have on Commercial Real Estate?

This article is part two of a six-part series focusing on the most critical questions about development and commercial property in Southwest Florida.   The volume of commercial real estate transactions in Southwest Florida decelerated over the last year, likely attributable to number of factors. These variables include escalating construction costs, scarcity of land for development, increasing insurance premiums, and growing interest rates.   Yet, despite this slowdown in commercial sales velocity, prices are still on the rise.  This brings us to the second critical question in our six-part series:  What Impact will Interest Rates Have on Southwest Florida Commercial Real Estate?  Undoubtedly, interest rates have a visible influence on the commercial real estate investment market. Elevated interest rates mean a hike in the cost of borrowing money and can ultimately dampen demand from developers and investors.  Interest Rates and Treasury Yields  Commercial mortgage rates are typically based on the 10-year treasury. Treasury yields peaked at 4.92 percent in October 2023 and currently hover at about 4.3 percent, roughly 80 basis points higher than we saw last April. Such rates can pose hurdles for properties that can’t generate enough cash flow to support high-leverage mortgages. Fortunately, rent growth should soften the impact of pricier borrowing costs on balance sheets.  The Federal Reserve Bank escalated interest rates 11 times in 2022 and 2023 to counteract skyrocketing inflation. Since inflation began to stabilize in mid-2023, the Fed has left rates unchanged in six of its last seven sessions. Currently, the U.S. inflation rate stands at 3.2 percent, and although the Fed disappointed many by announcing that it’s unlikely to reduce interest rates in the immediate future, experts still anticipate at least one rate cut before the end of the year.   More Interest Rate Stability Coming  We anticipate much more stability in interest rates from this point forward. As a result, property values in our region are poised for marginal growth, thanks to low inventory and high rent potential. However, we shouldn’t expect to see sales volume rebound to previous levels for another year to 18 months.    Are you prepared to take advantage once interest rates begin to fall? Whether you’re a property owner looking to position your asset for sale or a potential buyer seeking opportunities in our marketplace, the Commercial Property Experts at Cushman & Wakefield | Commercial Property Southwest Florida (CPSWFL) have the data, analytics, and local experience to assist you with your needs. Complete our online contact form or call CPSWFL at 239-489-3600 today to speak with one of our experts.   

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