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- The Bloodbath Begins
The Bloodbath Begins
The CRE Bloodbath Begins...
When There’s Blood in the Streets…
The WSJ put out a great article last week about interest rate caps killing floating rate CRE loans. Here’s the article.
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Too busy to click a link?
The highlights:Roughly 1/3 of CRE debt is floating rate. Most lenders require borrowers to buy an interest rate cap to protect against future rate increases. This cap gets repriced at fixed intervals over the loan term. With interest rates rising so quickly the cost of this cap has gone up 10 - 20x. This means a previously relatively small (like $10K-20K for a $10-$20M loan) and very predictable recurring expense could now be $500,000 - $1M. This is payment addition to your principal and interest payments. In some cases that could wipe out a year’s worth of net income.
With such a rapid increase in interest rates and lenders underwriting to increasing cap rates most of these deals will not fully underwrite to a fixed-rate refi. This means the borrower has two options:
1) Inject fresh cash. Since most of these properties are already stabilized with little potential for value-add upside it’s unlikely this cash will come from new outside investors. So these sponsors would have to be cash rich themselves and willing to put more dollars into deals with no additional upside… not super compelling.
2) Sell the properties quickly.
I predict we’re going to see a lot of option 2. Banks are not going to be flexible with borrowers like they were during COVID and more likely the opposite - forcing borrowers into a position where they have to sell assets quickly into a down market with rising cap rates. No bueno but no choice. Many of these deals may not recoup investor equity.
And were starting to see it happening:
What does this coming distress mean for you? Opportunity!
For groups that are well capitalized the next couple of years are going to be a great time to buy most property types. We’re seeing capital coalescing around platforms for distressed investment. Both for acquiring distressed debt and equity for rescue capital.
Unlike 2008-2010 I expect this cycle to move much more quickly. This means you’ll need to move fast if you see a distressed opportunity that’s compelling. We’ll be talking more about how to structure a distressed opportunity.
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P.S. If you're brand new to the EN Capital newsletter; each week we promote a new capital source for a variety of commercial real estate properties. So if the above lender is not relative to you, the chances are high that we'll have the perfect capital source for you soon.P.P.S. EN Capital is a commercial real estate mortgage brokerage shop. We are not direct lenders. Seriously, every time we do a blast some guy responds and gets pissy when he realizes we're brokers. It's on the top of our website, LinkedIn, clear in all our marketing. We honestly don't know how to make it more obvious. Don't be that guy.P.P.P.S. If you have a commercial real estate deal, unrelated to the above, that needs capital right now reach out to us and let's chat!
Be sure to connect with EN Capital on Linkedin. and visit our website here.
Nathan WhighamPresidentCA DRE Broker License: 01793655EN Capital Contact Info:www.encapital.com[email protected]Direct Line: 310-465-9253
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