Rising interest rates have slowed South Florida commercial real estate sales in recent months as buyers and sellers haggle over pricing, experts say.
The Federal Reserve has raised rates by 0.75 percentage points at two consecutive meetings, the fastest rate increase in four decades, in an attempt to push back against inflation. Most acquisition loans for commercial real estate have adjustable rates, so they are vulnerable to future rate increases.
Many groups that listed commercial real estate for sale in recent months are holding back now because they realize prices are not where they were a few months ago, said Jonathan Kingsley, executive managing director of office services at Colliers International in Fort Lauderdale. If interest rates increase, buyers need a higher financial return to cover their debt payments, he said.
“The cost to borrow is higher and the return is lower,” Kingsley said. “That imbalance has created a challenge for a lot of buyers in the market. They need to rebalance pricing.”
Since it’s not clear when the Federal Reserve will be done raising rates, it’s tough to predict where an adjustable-rate loan’s interest rate will settle.
Some pending loans didn’t go through after rates increased because they didn’t work financially with the higher rates, said J.C. de Ona, South Florida division president for Centennial Bank. The rate increase, combined with a sharp spike in construction costs, was a double whammy for development loans that put some projects on hold, he said.
“If you are buying a multifamily property or an office building, a shift in interest rates of 1.5% could make a pretty big difference when looking at your ultimate underwriting,” de Ona said. “A deal may not work. We have seen deals that worked six months ago not work now.”
Some high-profile deals have fallen apart. Miami Beach-based Starwood Capital Group pulled out of a deal to purchase a Miami Beach office building for $92.5 million, and will likely lose a $2.5 million deposit as a result.
Data from Tempe, Arizona-based Vizzda, which tracks all commercial real estate sales in South Florida, shows the number and price of deals slipped a bit in July compared to June. However, February was the slowest month of the year so far following a surge of deals in January.
Commercial real estate sales of $10 million and up in South Florida also fell in July compared to June.
“All of these [office] buildings that were previously ripe for sale will come back on the market in a few months because the leasing market in South Florida is so robust and values will be even higher,” Kingsley said.
The commercial real estate market is in a transition on pricing because capitalization rates, the annual revenue yield compared to the value of the property, have increased, said Dustin Stolly, co-head of the capital, debt and equity team at Newmark in New York. Apartment complex owners that passed on the opportunity to sell earlier this year will probably find lower prices for their properties if they tried to sell them now, he added.
A lot of deals have fallen apart in recent months because buyers can’t agree on pricing, but Stolly expects South Florida will perform better than most regions under these challenging circumstances.
“South Florida is probably the hottest region in the country now,” he said. “It has a lot of new jobs coming, net migration that is positive and home prices that have skyrocketed.”
The rent growth for both office and multifamily in South Florida has nearly kept up with the pace of interest rate increases, Stolly said. That is not the case in many other U.S. regions, he said.
Obtaining commercial real estate loans in recent months has been tough, especially for construction loans, said Paul C. Tanner, managing director of Fort Lauderdale-based Las Olas Capital Advisors, an equity partner in numerous commercial real estate deals. Banks are concerned about maintaining a healthy “spread” between interest paid on loans and collected on deposits. Since the bankers don’t know when interest rates will stop rising for depositors, they have a tough time pricing loans with a healthy spread.
“There’s almost no money for any development deals,” Tanner said. “It seems like the whole lender market has gone on vacation. I greatly suspect, as fall comes around and everyone goes back to work and gets an opinion on the slowdown, spreads will stabilize and fourth quarter deals will be crazy absorbing the backlog.”
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