Rising interest rates are resetting the New York investment market – killing deals, causing headaches for homeowners in need of new financing and, in some cases, creating a whole new set of opportunities.
“I know of a few buildings that have been taken off the market,” said Eric Anton, senior managing director of Marcus & Millichap. “There is a lot of repricing. If buyers signed a contract a month ago, after 30 days of due diligence, they come back and say, “I can’t do this.”
Last month, the Federal Reserve introduced the biggest hike in its benchmark interest rate in more than two decades, by half a percentage point, in a bid to curb soaring inflation. Central bank policymakers said they expect rates to continue rising this year; The June and July meetings are expected to bring increases of half a percentage point respectively. Chairman Joe Biden has made clear he supports the Fed’s attempts to stem the rapid cost increases hitting Americans this year.
The increases have already forced the nation’s largest office owners to rethink their strategies over the next 12 to 18 months and, in some cases, lower their expectations for operating performance growth for the year.
Now that’s playing out in the investment sales market, sources said, making some deals even harder to get through and forcing some sellers to lower their expectations.
Speculation swirls around that Innovo Property Group’s attempt to buy the HSBC tower at 452 Fifth Ave. went south because of interest rates. The $855 million deal fell apart last month after Innovo was unable to secure funding, according to The Real Deal.
Property and Building Corp., the building’s owner, is instead refinancing the property with a $385 million loan from JPMorgan Chase at a rate of 3.9%. HSBC announced last month that it would vacate the property to move its US headquarters to The Spiral in Hudson Yards.
HSBC tower in midtown Manhattan
“Midtown office buildings that used to sell for $800 a foot will now cost between $50 and $100 a foot less, especially if they’re vacant. It means risk,” Anton said. “Lenders are very nervous, more nervous than usual about the office property market.”
Landlords of office properties that have not had good rental records and are facing debt maturities are more likely to sell than pump more money into their properties, Anton said, highlighting the capital that has been “on the sidelines” while waiting for the last two. years.
For cash buyers and those looking to purchase properties requiring investment, the environment looks ripe for picking. But brokers said trading requires extra legwork in this environment.
“We have a lot of volume and we’re signing deals, but it takes three times the effort and focus,” said Helen Hwang, senior managing director at Meridian Capital. bisnow in an email. “The market has benefited from record interest rates over the past two years of Covid disruption, but most investors were expecting rates to return to pre-Covid levels – still historically low – they didn’t know just not the exact timing or the catalyst.
“Market volatility makes it difficult to determine the cost of debt and therefore the value of an asset,” Hwang added.
Interest rates are just one part of a complex story, said Michael Gigliotti, JLL’s senior managing director. Uncertainty about rising rents and concerns about the recession are also on the table.
“Certainly there are leveraged buyers who get less of a return,” Gigliotti said. “So interest rates have an effect. I just think there’s more to the story than that… It’s about people’s fears of recession or not, it’s about the belief that the people have in the history of rent growth.”
Moreover, now that real estate is attracting so much interest from investors, the value of assets is changing faster than before. Add to that the uncertainty about rates, and it is even more difficult to reach a consensus between buyer and seller.
“[Real estate] is much more liquid than it has ever been, so these price movements are going to be very smooth,” Gigliotti said. “How quickly does the investment sales market adjust to price and cause sellers and buyers to meet in the middle and decide to trade?
Archives Bisnow/Travis Gonzalez
Meridian Capital Senior Managing Director Helen Hwang and GreenOak Real Estate Partner Mark Van Zandt speak at Bisnow’s 2018 Forecast in New York December 12, 2017
Longtime players are also quick to point out that rates are still much lower than they were in decades past.
“I’ve seen this rodeo before,” Himmel + Meringoff Properties partner Leslie Himmel told Bisnow’s The State of the New York City Office Market event last week. “I think everyone needs to take a deep breath and not be a deer in the headlights. Keep going about your business, be patient.
Marx Realty CEO Craig Deitelzweig expects the current environment to help asset seekers. His New York company is on the hunt for office properties in New York, DC, Atlanta and Austin, and while the math on deals has changed, he expects the environment to benefit those looking. to buy.
“We could see assets coming into the market that might not have been available to us. And then in terms of interest rates, that would just be part of our calculation,” he said. bisnow. “So we’ll just have to make sure we get it at a price that makes sense so that we can make the improvements with the higher interest rates and still get the returns.”
In the first quarter of the year, some $5.4 billion worth of commercial property was sold in New York, putting the market on pace at more than double the investment volume of 2021.
But Compass vice-chairman Adelaide Polsinelli said the uncertainty would “cast a shadow” over the market – just as people felt comfortable buying again.
“The market is not stable, the market tends to go down day by day,” she said. “We are in a down cycle, unequivocally.”