You read yesterday about one scenario when the old adage “real estate always goes up” was not true. Real estate markets were turned over during Covid as people looked to flee formerly popular, densely populated areas, including the office buildings at their centers.
As people moved to rural areas or worked from home, offices in cities were left nearly empty. And prices for commercial real estate declined. When Covid restrictions lifted and the panic subsided, commercial real estate rebounded. That second trend appears to be over, as high interest rates have begun to take a bite out of commercial real estate deals. Peter Grant reports in The Wall Street Journal:
A growing number of commercial real-estate buyers are threatening to walk away from recent transactions unless the seller offers better terms.
Rapidly rising interest rates are to blame.
Investors who agreed to a purchase price earlier this year when financing was cheaper are now demanding price cuts or other concessions before closing.
That insistence on retrading deals began when bond yields started to rise in late summer. It intensified last month after the Federal Reserve raised its benchmark rate by a quarter percentage point and signaled more to come.
“Rates went up, what, just a few days ago and I’m already getting calls where they’re talking retrade,” Jeff Powers, a Cushman & Wakefield managing director, said last month.
The typical six to 12 months between when a buyer signs a contract and when the sale is completed can make a substantial difference in financing costs when borrowing rates are rising as rapidly as they are now.
Action Line: What goes up, might come down. Slight differences in interest rates can determine the profitability of real estate investments. Many investors add real estate to their portfolios for diversification. When you want to talk about diversification in your portfolio, email me at ejsmith@yoursurvivalguy.com.
