PREP FOR SUPPLY CHAIN ISSUES Investor interest in investment real estate has remained strong thus far into 2022 despite commercial loan rates increasing by roughly 150 basis points just this year. Apartment owners may benefit from today’s higher mortgage rates since fewer single-family home buyers now qualify for increasingly expensive homes, forcing them to rent. Investors concerned about rising interest rates should also consider the effect of persisting constraints on global supply chains. These have increased construction costs across all commercial asset classes and caused new product to enter the market quite slowly. With supply artificially low while demand remains strong, asset prices for multifamily and other CRE classes will likely continue to increase at least for the next 18-24 months. To ensure long-term portfolio stability and growth, investors should evaluate adaptive strategies such as portfolio reallocation/diversification, refinancing, and property sales and acquisitions. WITH SUPPLY ARTIFICIALLY LOW WHILE DEMAND REMAINS STRONG, ASSET PRICES FOR MULTIFAMILY AND OTHER CRE CLASSES WILL LIKELY CONTINUE TO INCREASE AT LEAST FOR THE NEXT 18-24 MONTHS.
USE YIELD MAINTENANCE
Not all prepayment penalties on fixed rate loans are created equal. The two main types are called Defeasance and Yield Maintenance. Defeasance is typically calculated on a step-down percentage basis, whereas Yield Maintenance is calculated based on the current interest rates at the time of sale. Defeasance is predictable and can be great if rates are going down. You know going in that if you sell at year six a 10-year loan, your prepayment penalty will be exactly 4% of the loan value. However, if you believe that rates will be higher in the future, yield maintenance will most likely be your best option. If the rate environment ends up being higher at exit than at acquisition, you would only pay the minimum yield maintenance, which could be only 1% or less of the remaining loan. As an example, on one of our properties, rising interest rates have decreased the current exit yield maintenance penalty by $5 million!
Choose wisely.
AS AN EXAMPLE, ON ONE OF OUR PROPERTIES, RISING INTEREST RATES HAVE DECREASED THE CURRENT EXIT YIELD MAINTENANCE PENALTY BY $5 MILLION!
Edward Day eXp Commercial Sacramento, CA Connect with Edward
Ashley Wilson Partner
Bar Down Investments Connect with Ashley
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