Sanford Herrick is the founder and managing principal of
Case Real Estate Capital LLC. He has helped to arrange investments in more than $5 billion worth of commercial properties
during the course of his career. In 2013, Herrick founded Case
Real Estate Capital, LLC, a commercial real estate investment
company with discretionary capital. The company is active
as a high-yield private lender, a financier of transitional properties, a purchaser of performing and nonperforming debt,
and an equity and mezzanine investor. Reach Herrick at
(201) 845-4244 or email@example.com.
Rising Interest Rates
Signal a New Investment Climate
Be flexible and identify the right lending partners for your deals
By Sanford Herrick
Historically low interest rates over the past decade have set the stage for many commercial real estate developers to easily obtain conventional financing in
order to build, acquire, renovate or reposition a wide
variety of properties.
This access to capital has enabled them to quickly act
on new opportunities in the marketplace while realizing healthy investment returns. Gradually increasing
interest rates, combined with a bullish stock market
and fewer real estate prospects in some major metro
markets, however, will likely put pricing pressure on
commercial and industrial properties going for ward.
Still, astute investors and commercial mortgage
brokers working in these areas should be able to find
Pressure on profits
Against the backdrop of a relatively strong economy
that has helped drive unemployment to record-low
levels, the Federal Reserve has been gradually increasing
interest rates, including another nudge this past June.
Traditionally, well-placed commercial real estate has
been a haven for investors seeking solid returns.
History also indicates, however, that in a rising
interest rate environment, the increased availability
of other types of investments with good returns may
put pressure on real estate valuations. In today’s environment, this trend is being exacerbated by a relatively
sharp rise in bond yields, which is being spurred by investor concerns over the durability of the stock market.
Additionally, there is tremendous new-construction
build-out in certain metro areas. In the New York City/
Northern New Jersey market, for example, the ongoing
Hudson Yards project — a multiuse development
encompassing more than 18 million square feet of
commercial and residential space — has contributed
to yield pressure by placing a staggering amount of
additional product on the market, even as these
kinds of projects limit the ability of other builders and
investors to find “clean” or undeveloped land.
Markets like New York City/Northern New Jersey
should remain robust through 2018 and 2019. New
Jersey’s distribution capacity, its dense population,
and its proximity to seaports and airports will likely
eclipse concerns about its aging infrastructure and the
specter of rising state taxes.
The region’s retail component will continue to offer
significant opportunities on a case-by-case basis,
especially in the wake of the U. S. Supreme Court’s recent
decision that allows states to require online retailers
to collect sales tax. This should help level the playing
field for brick-and-mortar retailers.
Across property sectors and geographic locations,
deal participants should continue to look at investment
fundamentals. Despite challenges, investors, mortgage
brokers and lenders who balance imagination, caution
and commitment can discover profitable opportunities.
Weighing the risks
Imagination refers to the ability to see beyond the obvious and to have the vision to consider new possibilities.
This may include identifying investment opportunities
using a limited inventory of undeveloped land, as well
as rehabilitating or refreshing existing properties. The
latter approach is being more widely embraced as the
inventory of open land continues to shrink.
Caution, of course, refers to the ability to engage
in due diligence by thoroughly examining potential
opportunities and carefully weighing the risks and rewards. Commitment also is a key component of the mix.
A commercial mortgage broker, investor or builder
may have the right mix of imagination and caution to
make a project happen. Still, they also need to identify
a committed lender that is able to understand their vision
and tap into a base of capital that can enable that
vision to be realized.
The ongoing consolidation of traditional lending institutions, however, has limited the number and availability
of conventional capital sources. Simultaneously, larger
institutions have increasingly focused their attention
on larger loan opportunities, reducing the number
of options for small-balance investors and mortgage
brokers. These conditions have increased the need for
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