Commercial property sales slow as rising interest rates send transactions plummeting

Commercial real estate has been showing the first signs of cooling for more than a year, disturbed by the rise in interest rates which is already causing some transactions to fail.

Property sales were $39.4 billion in April, down 16% from the same month a year ago, according to MSCI Real Assets. The decline follows 13 consecutive months of increases.

Hotels, office buildings, retirement homes and industrial properties saw sharp declines in sales. Sales of other property types, such as retail and apartments, rose in April, but analysts and brokers said activity could also slow in those sectors as rising interest rates interest prevents some investors from making competitive offers.

In March, total commercial property sales were up 57% from the same month a year earlier.

“To move it from a very rapid pace of growth the previous month, the speed of this transition is shocking,” said Jim Costello, chief economist at MSCI Real Assets. A drop in sales can be an early indicator of stress in property markets as prices are generally slower to change, he added.

After an initial pandemic alert in which sales of most types of commercial real estate declined, commercial real estate sales began to rebound in late 2020. Low interest rates and strong demand, particularly from multi-family and industrial tenants, have fueled property sales throughout 2021 and into this year. .

Now, with dramatically higher interest rates – the yield on 10-year Treasury bills, a common benchmark for commercial mortgages, has nearly doubled this year – real estate investors who rely on large amounts of debts were among the first to fall off the market, brokers and investors said.

In some cases, investors find that as the cost of borrowing increases, their short-term rate of return is lower than the interest rate on their mortgage. Lenders, in turn, are now tightening their standards for more speculative transactions, brokers said.

In some sectors, such as small industrial and commercial buildings, potential buyers who wrote letters of intent to buy properties weeks ago are now abandoning their offers because the cost of borrowing has risen so quickly, a said Joshua Campbell, senior vice president at Stan Johnson Co., a commercial real estate brokerage firm.

“That wasn’t happening two or three years ago,” Mr Campbell said.

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Other investors are moving away from agreements already reached. Innovo Property Group recently walked away from a deal to buy a Midtown Manhattan office tower for $855 million after soaring interest rates made it harder to find a mortgage, a person says close to the file. The flip-flop meant the investor lost his $35 million deposit, according to another person involved in the deal.

Soaring interest rates in recent weeks have left many investors with a choice between losing their deposit or paying far more than expected on their mortgage, said Jay Neveloff, partner at law firm Kramer Levin Naftalis & Frankel LLP.

Most have moved forward with planned purchases, he said, but other investors are now more cautious about signing new deals. This will inevitably drive prices down. “Pricing cannot be blind to changes in financial markets,” Neveloff said.

As the pool of buyers shrinks and interest rates rise, sellers are increasingly likely to make concessions to secure deals, said Henry Stimler, executive in the multifamily capital markets division of Newmark real estate company.

His firm recently negotiated the sale and financing of a $457.5 million multi-family portfolio focused in the Carolinas, where rental growth has been strong over the past year.

“It’s now turning into a buyer’s market,” Mr. Stimler said.

Write to Will Parker at [email protected] and Konrad Putzier at [email protected]

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