CategoriesCRE News

What Does Higher Interest Rates Mean for the CRE Market

Every business is created and commissioned with one of its sole aims of being profitable. However, this can only be possible when the business owners and entrepreneurs can actualize a significant increase in the demand for their goods and services, which causes an increase in their income rate.

Higher interest rates occur when money lenders must pay an increased amount of money to their investors than the initial amount of money borrowed.

Higher interest rates limit the percentage of individuals seeking to obtain loans for their start-up enterprises and businesses. This action decreases the expansion of businesses hampering the development of a nation’s economy in the process.

Commercial Real Estate is classified into four different categories, which are as follows;

Office:

These properties are specially built using architectural designs that best suit individuals to enable them to carry out activities specific to the action executed in the establishment.

Industrial Purpose:

These structures are designed to enable individuals to perform specific activities. They can be in power plants, warehouses, malls, etc. They are located mostly in areas distant from housing settlements to prevent any form of complications or hazards.

Multi-family Buildings:

These types of buildings are erected for the sole aim of providing housing settlements for individuals. They vary in size, space, and appearance. They include; apartments, flats, duplex, condominiums, penthouses, semi-detached, etc.

Rental:

These buildings are leased out at an agreed-upon price to individuals seeking to carry out an activity until the lease is elapsed. These activities encircle social gatherings, malls, etc.

 

Effects of Higher Interest Rates on the CRE Market

The commercial real estate market is impacted positively and negatively by increase in interest rates. The effects of the increased interest rates will further determine and influence individuals in making the necessary decision concerning their businesses.

The Capitalization rate (cap rate) is the required amount of return on investment investors make. It is generated by dividing the Net operating income by the current market value.

Positive Effects of Higher Interest Rate

Improved Economy:

When there is an increase in the interest rate level on business owners and entrepreneurs, it causes a growth in the economy of a country or state. An improved economy will serve as a haven for individuals venturing into businesses to see the possibilities of succeeding as the policies surrounding business ownership will give them the required room to grow their business properly and amass the necessary profit from it.

Negative Effects of Higher Interest Rate

Higher Expenditure:

The expenditure cost of building and owning a business will increase with a higher interest rate. This will cause a limit in the number of goods and services provided by entrepreneurs, a higher cost of rent for commercial real estate, and the foreclosure of businesses that cannot get back enough income to pay back their loans and continue their businesses.

Decrease in Capitalization Rate:

An increase in the interest rate will affect the expected cap rate of investors due to the demand of spending more money which will require business owners to borrow more funds. When entrepreneurs lend more funds to meet their market target, investors tend to lose more money if the business fails to reach its expected valuation.

 

The Take-away

While the media pundits proclaim a high interest rate environment will be the downfall of the CRE industry, it’s important to cut the noise and explore the fundamental analysis. There are some negative effects of the changing times, but there are also some clear benefits to understand and consider while we move further into the roaring 20’s.

CategoriesCRE News

Top 10 Commercial Real Estate Trends for the Roaring 20’s

COVID-19 has significantly impacted the housing market this past year, leading to both positive and negative changes in the commercial real estate market. Let’s look at how those changes affect the overall housing market and what trends are on the horizon.

10. Housing choices are scarce

The inventory for housing is low, yet demand is on the rise, and COVID-19 has only made this problem worse. Since 2020 listings have been on the short end, reaching some of the lowest levels on the record. Buyers are struggling to find homes, often meeting bidding wars and compromising on their dream home. Since 2021 listings have begun to rise slowly, however choices remain in short supply.

9. The market is becoming increasingly competitive

Due to short supply and high demand, buying a home has become a fierce process. Homes are selling fast, and buyers need to be quick in their offers to secure a purchase. Since April of 2021, Homes have been selling in less than 20 days, giving buyers very little time searching and considering their choices.

8. Housing prices are still rising

Housing affordability has been low as of recent leading prices to rise by almost 20% since the beginning of this year. Due to the low inventory of housing, costs are expected to increase. Sellers can expect more profit in their sales, while buyers may need to consider their budgets in the coming months.

7. Interest rates are at an all-time low

Low rates are a good sign for buyers and sellers. In January, a fixed-rate mortgage was only 2.74%. With the shortage of homes and rising prices, Buyers will take advantage of these low-interest loans to buy more houses faster, and sellers will have no trouble finding offers for their homes in a short period.

6. Virtual real estate has become a desirable way to sell

With everything going online since the rise of COVID-19 virtual real estate has found a new spotlight. Sellers can now post their homes on websites or hire a virtual agent to help with the hassle of selling, all with a few clicks. Buyers can also take advantage of the convenience of online selling by browsing multiple listings much faster and making offers all from the comfort of their own homes.

5. The Biden administration is focusing on housing

The president and his administration have been taking housing issues very seriously. The SECURE Act is once again in Congress; this bill would enable remote notarizations, which would aid the online housing market in closing home sales digitally. Biden has implemented a rental assistance program as part of his American Rescue Plan to assist renters who have been affected financially by COVID-19.

4. Foreclosures are beginning to resurface

In the last month, one in every 12,700 homeowners filed for foreclosure. Filings are up 23% from last year, and states like Florida and New Jersey have seen some of their highest foreclosure rates. Though these numbers may sound alarming, these statistics come after the foreclosure moratorium ended, so these results are expected as banks are working through backlog built up during 2020.

3. Extension on protections for renters and homeowners

With the eviction moratorium extended until July 31st, 2021, to prevent a historical wave of mass evictions, renters and homeowners can rest without fear of losing their homes. This extension gives those with financial hardship due to the pandemic more time to get back on their feet. The Biden administration has said this will be the last extension on the moratorium.

2. A housing market crash is unlikely

Experts say it’s unlikely we will face another housing crisis as we did in 2008, despite a current economic recession. With record numbers of equity for property owners that protect them in their home losing value, stricter lending and borrowing standards, low-interest rates, and high demand, it seems the housing market faces a prosperous future.

1. House flipping is becoming less profitable

Returns on investments for house flipping have been dropping. Homes are selling at astronomical rates; however, flipped houses have seen a 2% drop in profit. Flipping profits dropping could be a marker that the post-recession housing boom is coming to an end, according to ATTOM Data Chief Todd Teta.

CategoriesCRE News

Raising Equity Through Crowdfunding: The Players and What to Expect

Although in its infant stages, crowdfunding in the commercial real estate space has made leaps and bounds in just a few short years. Here is an analysis of the prominent players and what you should expect during the process.

Exposure: Dramatically increase the exposure of your equity opportunities to a wide international audience looking to invest in top 50 MSA locations.

Centralize: Centralize the offering by narrowing in on ONE platform to host the crowdfund, directing all interested parties to that platform.​

Innovate: Begin taking the steps to move toward the future of capital raising.​

Debt or Equity: First, decide whether you intend to pursue debt or equity funding.​

Choose a Platform: Decide on a platform. All platforms differ in how they approach the underwriting process, how they structure deals for investors, and the requirements in place for borrowers and fundraising companies.​

Proven Track Record: Depending on the platform, applicants need to prove that they have adequate history of involvement in successful projects. For example, Fundrise requires $100M worth of projects​.

Apply: Submit your application. Be thorough in answering each question on the marketplace platform you choose. Some requirements include tax returns and deeds showing ownership of properties.​


What Is The Expected Raise Timeline?

Every platform has different timelines, although you should expect the same as a traditional raise​.

The only additional time required is the submission process, which could take up to 7 business days depending on the platform​.

Equity partners who we do not meet on the platform can still place their equity using the platform we choose to use, which can speed up the raise​.


Breakdown of the Best CRE Crowdfunding Platforms

  • RealCrowd
    • Open marketplace where sponsors and investors make connections, grow networks, carry out transactions, and do deals without all the institutional intermediaries and encumbrances that existed in the pre-JOBS Act era
    • 20,000 accredited investors​
    • Facilitated over 130 different deals—18 of which are funds, with the rest being individual assets—in over 30 states and over 80 different cities.
  • Fundrise
    • $10M – 100M in Top 50 MSA​
    • Sponsor must have $100M in real estate experience through sales or acquisitions​
    • Both Equity and Debt solutions​
    • Deals reviewed within 48 hours and underwriting within 4 weeks to close​
    • No prepayment penalty​
  • Crowdstreet
    • Over $1B raised​
    • Company assists with the marketing plan to attract the best investors​
    • Some deals have been financed within 24 hours of posting on the website​
  • EquityDoor
    • Based in Austin TX, this platform requires the sponsor to have an already-existing pool of investors​
    • The website is a bit outdated and there are no success stories or stats on how many deals have been done through the platform​
  • RealtyShares
    • Over $870M deployed to date, 1,160 transactions across 41 states with values over $2.7B​
    • Provides Common Equity, Preferred Equity, and Mezzanine Debt​
    • Up to 90% LTV​

Are There Any Success Stories?​


Article sources:

  • MarketWatch
    • Real Estate Crowdfunding Market Growth Analysis By Revenue, Size, Share, Scenario on Latest Trends, Types and Applications Forecast 2026
  • Forbes
    • How a Downturn Can Affect Crowdfunding

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