Commercial Real Estate Prices to Remain Low for the Foreseeable Future

Property values might start rising up to two years following a sales activity rebound.

 

Commercial Real Estate Prices Unlikely to Reach a Bottom Any Time Soon

The U.S. commercial real estate market is facing a continued sales decline due to high-interest rates and investor caution. While some experts have called for a bottom soon, history tells a different story in property prices.

Where we are now: Investors are currently adopting a wait-and-see approach due to the uncertainty brought on by higher borrowing costs. This cautious stance has slowed down the price discovery process in commercial real estate. Historical patterns suggest that it may take time for sales activity to pick up and for prices to stabilize. CoStar's research delves into previous commercial real estate market downturns, providing insightful projections on the expected recovery timeline.

Office sector: Looking back at the 2007 downturn, office real estate transaction volumes peaked and then significantly declined, taking two years to hit a low. Despite a 63% increase in transaction volumes over the following two years, office prices per square foot continued to drop, indicating that increased transaction flows can exacerbate price declines.

Industrial and Retail sectors: Similar trends were observed in the industrial and retail sectors. The industrial market saw a 61% decrease in deal flow, followed by a significant increase in transactions but a continued decline in overall value. Retail properties experienced a recovery in transaction counts, but it took even longer for retail prices to reach their lowest point, demonstrating a lag between transaction recovery and price stabilization.

Multifamily resilience: The multifamily sector deviates from these patterns. Due to its short lease structures, this sector is more responsive to economic changes. In the last downturn, transaction volume slowdown and price declines in multifamily occurred simultaneously, with prices stabilizing much faster than in other sectors. This rapid adjustment could offer insights into the broader commercial real estate market's future trajectory.

➥ THE TAKEAWAY

Where is the bottom? The past may be a precedent. The current state of the commercial real estate market suggests that prices may not bottom out soon. Based on historical data, it could take up to two years after a rebound in sales activity for property values to start increasing. The multifamily sector's quicker response in past downturns might provide some clues, but overall, the market is likely to experience continued price adjustments in the near future.

Source: Commercial Real Estate Prices to Remain Low for the Foreseeable Future

https://www.creconsult.net/market-trends/commercial-real-estate-prices-to-remain-low-for-the-foreseeable-future/

Signals Emerge It's Prime Time to Invest in Multifamily

With strong fundamentals, new construction starts, and a sizable amount of capital on the sidelines, the multifamily sector is attracting the attention of eager investors.

'Enormous' Amount of Capital on Sidelines Means Now Is Time to Buy Multifamily

With strong fundamentals, new construction starts, and a sizable amount of capital on the sidelines, the multifamily sector is attracting the attention of eager investors, saying now is the time to start deploying capital.

Market dynamics: According to John Sebree, the senior vice president and national director of the Multi Housing Division at Marcus & Millichap, the market is seeing an occupancy surge, consistent rent growth, and a housing shortage. Over the recent years, there's been an influx of new market deliveries, although multifamily starts have decreased by more than 50% from Q4 2022 to Q3 2023. This has led to a minor spike in vacancy rates, but as new units get absorbed, an imminent scarcity will likely drive rents higher.

Capital on deck: Sebree emphasized the vast capital awaiting an opportune moment to re-enter the market. Quoting Lloyd Blankfein, he stressed that investors shouldn't wait for a market bottom signal but act proactively. With limited deals, he anticipates intensified competition as sidelined capital re-engages. For eager investors, Sebree advised determining their expected cap rates, hinting they'd likely be between 5.5 and 6 in the current market.

Shifting investor interest: Global investors are also considering a shift from the US office sector to residential properties. The American Federation of International Real Estate (AFIRE) predicts investors will increasingly focus on multifamily due to changing market dynamics and the allure of stable returns. This shift reflects growing optimism in the multifamily market and its potential for long-term growth.

➥ THE TAKEAWAY

New investment horizons: With high occupancy rates, robust rent growth, and the housing shortage, multifamily properties continue to provide stable returns. While challenges such as high interest rates and constrained debt markets persist, the significant amount of capital waiting on the sidelines offers an opening for eager investors to enter the market. As regional market preferences shift towards suburban areas, multifamily assets in these locations may present lucrative investment opportunities for those seeking long-term growth.

Source: Signals Emerge It’s Prime Time to Invest in Multifamily

https://www.creconsult.net/market-trends/signals-emerge-its-prime-time-to-invest-in-multifamily/

How Rising Interest Is Affecting Floating Rate Refis

And that’s before considering the effect of rising Treasurys yields.

The CRE refi market is tough as anyone in the business knows at this point. But the dual explanation of interest rates being high and many lenders — banks in particular — tightening standards and even pulling back from the markets is still fuzzy.

CRED iQ did some data analysis to get a better numeric understanding of at least one mechanism in place based on the Secured Overnight Financing Rate (SOFR). Rather than looking at a rate range the Federal Reserve sets for the federal funds rate, this is “a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities,” as the Federal Reserve Bangk of New York explains. Unlike the old LIBOR measure, the data is based on collected transaction costs and not self-reported numbers that banks could manipulate for gain.

The firm mentioned that floating rate CRE loans are a challenge when interest rates are rising, which makes sense. Unless an investor, developer, owner, or operator has planned ahead, the increasing rate tide means a good chance that whatever floating rate a plan has anticipated won’t be enough.

“CRED iQ’s report on Floating loans revealed that ~44% of floating rate loans with near term expirations will see rate cap agreements expiring before those loans mature,” the firm said. “Based on SOFR data posted by the Federal Reserve Bank of New York, its apparent the rise in SOFR is having a dramatic effect on pending floating rate loan maturities.”

A reminder that correlations aren’t the same as causations. Two sets of data can trend in the same direction and still not entirely or even partially cause one another’s movements. CRED iQ did find many apparent relationships in lending and SOFR. They found “effects of the rising interest rate environment when analyzing Fannie Mae floating rate issuance, including the aggregate Average Original Note Rate, Average Loan Scheduled Interest Due, and how these metrics vary by Seller.”

“When analyzing the trailing twelve-month (TTM) data, it’s evident that the average interest due on Fannie Mae loans has surged by over 280%,” CRED iQ wrote. “This surge is exerting substantial pressure on Debt Service Coverage Ratio (DSCR) and Loan-to-Value (LTV) ratios for these properties.” If rates jump on a floating rate loan, then more money goes into rent-taking with less available to improve DSCR and lower property values increasing LTV.

Keep in mind that there are other influences, like rising yields for Treasurys. They serve as gauges for safe returns to help determine risk-adjusted management. The short end of the Treasurys are over 5.5% yields. A 1-year on Monday, September 25 is 5.46% The 10-year is 4.44. Investors want a substantial return to walk away from a safe investment. And BlackRock, the largest asset manager, thinks that rates will continue high and could keep climbing from 16-year highs.

 

Source: How Rising Interest Is Affecting Floating Rate Refis

https://www.creconsult.net/market-trends/how-rising-interest-is-affecting-floating-rate-refis/

Should I Sell or Should I Hold? When is the best time for asset repositioning?

When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.

The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’

Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?

So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.

There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.

However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?

As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.

Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:

Request Valuation

 

Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?

https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/

Should I Sell or Should I Hold? When is the best time for asset repositioning?

When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.

The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’

Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?

So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.

There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.

However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?

As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.

Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:

Request Valuation

 

Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?

https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/

Selling an Apartment Building FAQ's

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Top Frequently Asked Questions on Selling a Multi-family in Chicago

Are you thinking of selling your multi-family property?

Here are some of the most frequently asked questions we get from clients looking to sell multifamily properties in Chicago.

Before You Sell:

How is selling a multi-family different than selling a single-family home?

If you’ve sold an investment property before, you’ll be familiar with the ins and outs of selling a multi-family. However, if it’s your first time, you’ll learn that the process works differently than it would with a single-family or condo.

A large part of a multi-family’s sale appeal will lie in its cash flow. Buyers looking for a multi-family are looking for more than just a home: they will want to see a property that generates good rental income, rents easily, and provides a financial incentive for them to buy. This could be in the form of easy upgrades they can make to boost rental income or as an empty unit for them to occupy and offset their own living expenses.

Do I need a broker to sell a multi-family?

Of course, we’re biased...but we do recommend working with a broker who is experienced in the multi-family market in your neighborhood. Not only will they be able to pull good comps and provide a market analysis of how you should price the property, but an experienced agent will know how to show the proeprty to different types of buyers, whether they are experienced investors or first-time multi-family buyers who want some supplemental income. Brokers who work in multi-family markets are also in the know about rent prices and trends, which will help them sell your home at the right price.

Do I need to make repairs before selling?

Some buyers look for multi-families with units that could benefit from some updating because they see it as an opportunity to raise the rent using some sweat equity. Your agent should be knowledgeable of the renter’s and buyer’s market for your area and property type and will have good recommendations of what types of updates to make before selling.

Making simple upgrades around the property and in common areas like hallways and entryways can be an easy way to boost the property’s curb appeal that won’t break the bank, whether it’s through new fixtures or a fresh coat of paint.

How do I list a multi-family?

One of the most important parts of getting ready to list your property is confirming the number of legal units in the building. In a city full of old homes like Chicago, many apartment units have been created in old basement spaces or have been de-converted into larger single unit. If you sell your property with an incorrect number of legally recognized units, you could face legal issues down the road. To get the most accurate picture of how your property should be valued and listed, get in touch with the local village to confirm the number of legal units listed in their records.

How should I price my multi-family?

Buyers and their lenders will typically appraise a multi-family home using the income approach method instead of simply using comps in the area to compare values. This means that the appraiser will look at the cost of property maintenance and rental income to evaluate a property’s cash flow. To price your multi-family, you should do appraise a building’s income and use comps in the area to accurately represent what someone might want to pay for it.

How should I market my multi-family?

• You’ll want professional photos of each unit to get ready to list your property, which means asking your tenants to clean their spaces and set up a time for the photographer. Having an empty unit comes in handy because it gives you the opportunity to deep clean the space and potentially even stage it with furniture to show off its potential.
• Put together a financial breakdown and lease abstract to show possible buyers. This might include details like current rents, cost of utilities, and other maintenance fees to give them a better idea of potential rental income.

Selling a building with tenants.

How do I sell my multi-family with occupied units?

One of the trickiest parts of selling a multi-family is to make sure that you are aware of your tenants’ legal rights and that you make the selling process as effortless for them as possible.

• Breaking the news to tenants: Announcing that you’re listing your property for sale isn’t the easiest conversation to have with tenants. For them, it means the hassle of cleaning their apartments for multiple showings, a change in landlords, and a potential increase in their rent after the sale. However, you are legally obligated to inform your tenants when you sell the property, so it’s important to have that conversation before getting too far into the selling process.
• Tenant’s rights when a property is listed for sale: To protect yourself from liability and provide a smooth transition for your tenants during the sale process, it’s important to be aware of their rights determined both by the state and by their lease agreement. Your tenants most likely have a right to be notified a set amount of time before showings and have a lease that can’t be terminated just because you want a vacant unit to sell the property. Reread your lease agreements and the tenant’s rights for your city before listing your home or schedule showings.

How do I show a property with occupied units?

An experienced Broker will know the ins and outs of how to show a property with occupied units (which is one of the biggest reasons why you should take your time to find a good agent). The most important concern when it comes to showing units is to make sure that the tenant is aware of the appointment sufficiently ahead of time. Check your lease agreement to see if there are already guidelines in place, or contact your tenant prior to listing the process to come to an agreed-upon amount of days or hours before the showing when they should be contacted.

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

Request Valuation

 

Source: Selling an Apartment Building FAQ’s

[/ux_text] https://www.creconsult.net/market-trends/selling-an-apartment-building-faqs/

Should I Sell or Should I Hold? When is the best time for asset repositioning?

When it comes to selling their investment properties, clients typically ask me,’ Why should I sell?’ Great question. Why should you sell? The obvious answer is that you purchased the investment property as an investment, and it may not be doing as well as other investment opportunities, and after a while, you don’t realize the appreciation and thus maximization of profit from the property until you sell and acquire another investment property. So the question is really, ‘When should I sell? Clients really lose the perspective of the driving reason why they invested in an investment property in the first place. An investment property is just that; an investment. Treated as such, every investment must have a horizon and an exit strategy. If a property was purchased as an investment, then it makes full sense to profit as much as possible from the investment.

The real estate market, like any other market, will go through peaks and valleys. Trying to predict the exact moment of peak or the exact moment the market reaches the bottom is practically impossible. The real estate cycle has four phases; recovery, expansion, hyper supply, and recession. The complete real estate market cycle seems to have an average duration of about 18 years as there is good historical data to support that. So, where are we in that cycle now? How much more upside will we see before we reach the peak? The question really is, ‘What is your appetite for risk?’

Below is a chart of the real estate cycles dating back from the 1800s. The last real estate market crash started at 2006. We are almost 16 years into that cycle. Interest rates are still at all-time lows. Money is cheap, and the threat of inflation is very high. How long can government print money without paying the price down the road? How much road do we have left?

So when is a good time to exit an investment property? As with everything else, real estate is cyclical. Those of us that have been around for some time have witnessed several cycles in the real estate market. Since it is practically impossible to predict the peak of cycles, what strategy should you then use to maximize your investments? Keeping it simple, when evaluating if you should consider selling an investment property, it doesn’t really matter what the current real estate market is like. If you are looking to replace the investment property with another investment property, the ultimate decision to sell should also be based upon if you can increase your returns with the new replacement property, not what state the current market is in now.

There are a number of factors that can impact real estate prices; availability, investment potential, and interest rates, to name a few. Interest rates impact the price and demand of real estate—lower rates bring in more buyers due to the lower cost of money but also expand the demand for real estate, which can then drive up prices. As interests rate starts to inch up, the cost of money increases, and thus the appetite for real estate investments declines.

However, there are many ways that one can still protect their investments. 1031 Exchanges give investors a vehicle to reposition assets and mitigate risk. There are certain asset classes that inherently hold less risk and still perform as an investment vehicle. The questions really come down to; ‘How long do I hold on during this cycle? Do I have the time horizon to outlast another cycle? Is it time to reposition and take advantage of 1031?

As part of the team for our client’s investments, we specialize in building solutions around our client’s needs. We analyze the requirements, crunch the data, and present assets entirely based on their circumstances and the goals they are trying to achieve with their investment.

Have you thought of selling your property and would like to know what it’s worth? Request a valuation for your property below:

Request Valuation

 

Source: Should I Sell or Should I Hold? When is the best time for asset repositioning?

https://www.creconsult.net/market-trends/should-i-sell-or-should-i-hold-when-is-the-best-time-for-asset-repositioning/

Commercial Mortgage Rates Update

Today’s commercial mortgage rates

Loan program type

Interest rates

Freddie Mac Optigo

5.59% - 7.06%

Fannie Mae

5.17% - 6.67%

HUD 223(f)

5.35% - 6.25%

CMBS

5.29% - 7.47%

Regional Banks/Credit Unions

5.37% - 10.00%

Life Insurance Companies

4.97% - 6.41%

Debt Funds

8.69% - 14.94%

HUD 221(d)(4)

5.95% - 6.85%

Note: These commercial mortgage rate ranges should be considered "typical", but outliers exist on both the high and low end. These are not guaranteed rates on any particular commercial real estate deal.

 

Commercial Mortgage Rates

Commercial mortgage rates constantly change, and updating live rates is often tricky. Several factors determine commercial real estate loan rates, but the most important factors are supply and demand. Retail real estate investors are constantly looking for properties that meet their investment criteria, and commercial mortgage lenders want to understand the property's risk/return profile for these property investments before making loans available.

How Frequently Do Commercial Mortgage Rates Change?

Commercial Mortgage Rates change every day because most lenders, particularly banks and credit unions, set their interest rates by "index" rates ultimately governed by national institutions like the United States Federal Reserve and the US Department of Housing and Urban Development ("HUD"). Commercial real estate loans involve more risk than government-backed bonds, so interest rates are usually at a premium or "spread" over the underlying financial indices. Commercial mortgage rates are also usually somewhat higher than residential mortgages, except for lower leveraged loans for the strongest borrowers.

Who sets commercial real estate loan rates?

Some commercial mortgage rates are based on the "prime rate" directly governed by Federal Reserve Board. Other commercial mortgages are pegged to US Treasury Bond Yields. Still, others have variable interest rates tied to indices like LIBOR or SOFR, which mirror the rates that financial institutions' own cost of borrowing funds in the global credit market. Commercial real estate loans are typically pegged to one of these economic indices with some added premium or discount, depending on risk.

How are Commercial Mortgage Rates used?

Commercial banks charge higher commercial mortgage rates and fees than residential properties because there's more inherent risk involved when it comes down to lending out large sums of money for investment purposes. The more incredible loan amount at stake may also require additional security measures from borrowers who need these loans, resulting in a more complex loan structure and potential recourse against the borrower's assets and property.

There are eight major commercial loan programs, each with a different range of rates. Retail real estate investors use current commercial mortgage rates to determine their cost of capital for a particular investment to see if it's worth investing in.

The current market conditions determine commercial loan rates, but there is a lot of back and forth with lenders to negotiate terms.

Commercial mortgages can be hard to obtain, especially for borrowers who don't have perfect credit, a high net worth, or a long track record in real estate investment.

Commercial mortgage rates change all the time because they're affected by several factors, such as:

• The current economic outlook affects consumer confidence (how much people plan to spend and invest). This also determines if banks need more liquidity.
• Federal interest rate changes often affect commercial mortgage rates closely after rising or falling since commercial loans can impact businesses' ability to participate in the local economy and create jobs at home.
• Increases or decreases in inflation since property investments are typically long-term assets.

Multifamily Investment Property Loans

Commercial mortgage rates apply to multifamily investment properties (like apartment buildings and mobile home parks) and commercial properties. Retail real estate investors can take out loans for these significant investments, and they have several options, such as fixed-rate or adjustable rates.

There are eight major commercial loan programs, each with a different range of rates. Retail real estate investors use current commercial mortgage rates to determine their cost of capital for a particular investment to see if it's worth investing in.

Fixed-rate loans offer a stable payment based on the original loan terms over a fixed period, usually between five years and thirty years. These set payments allow commercial property owners to pay off their debt on a predictable schedule that maximizes their cash flow or equity position.

Freddie Mac Optigo Commercial

One of the primary lenders for multifamily investments is US government agency Freddie Mac with their Optigo multifamily loan program. This loan program provides non-recourse commercial mortgages of $1 Million or greater for apartment buildings with stable occupancy and experienced managers.

Commercial Property Interest Rates

The average interest rate for commercial properties fluctuate based on current economic factors. The rates will also vary between various commercial property types. A few examples of commercial property types include:

Loans for property types with solid economic tailwinds typically command more favorable financing rates and terms. Multifamily and industrial properties are currently in high demand on the capital markets and will see some of the lowest interest rates. Lenders may see hotels, office buildings, and specific retail properties as more risky financial bets, so financing rates and terms may be less favorable.

• Office Buildings
• Hotels and other hospitality properties (motels, resorts, Airbnb rentals, etc.)
• Strip Malls
• Medical offices
• Grocery-anchored shopping centers
• Industrial properties like warehouses or factories
• Self-storage facilities
• Religious centers
• Hospitals

Loans for property types with solid economic tailwinds typically command more favorable financing rates and terms. Multifamily and industrial properties are currently in high demand on the capital markets and will see some of the lowest interest rates. Lenders may see hotels, office buildings, and specific retail properties as more risky financial bets, so financing rates and terms may be less favorable.

Top 11 Questions About Commercial Real Estate Loans

Here are some of the most frequently asked questions investors ask:

What qualifies as Commercial Real Estate?

Commercial real estate is any property where most of its use (generally at least 50%) falls under commercial or business usage. Commercial properties include office buildings, strip malls, hotels/motels, shopping centers, warehouses, etc. Commercial mortgages are available for all types of commercial properties.

Commercial mortgages also apply to Multifamily properties (apartments, mobile home parks, student housing, and senior housing) if the property comprises five or more residential units.

Why use a commercial real estate loan?

Commercial real estate loans can be used to acquire, develop, or refinance a commercial or multifamily property and are typically larger than residential mortgages. Much like buying a home with a consumer mortgage, a commercial mortgage allows the property owner to own and invest in the property with less cash than the total value of the property. Using a commercial mortgage with a low-interest rate to purchase a property can also boost an investor's financial returns.

What is an ARM Commercial Loan?

ARM stands for an adjustable-rate mortgage, also known as a Variable Rate. ARMs are often used when borrowers desire lower monthly payments in the short term but are willing to accept the risk of a higher interest rate. Commercial ARMs can be helpful for borrowers looking at several years of low commercial mortgage rates without taking on additional costs or restrictions of a fixed-rate loan, like a prepayment penalty.

Who controls Commercial Interest Rates?

The Federal Reserve and its members (or the central banks of various countries outside the US) highly influence commercial loan interest rates. Commercial real estate loans have been affected by The Fed's quantitative easing program, which has kept commercial bank lending rates near historic lows since 2012. This is an advantage because it makes borrowing cheaper than ever before while also helping businesses find qualified buyers with substantial capital available when buying properties.

How do Commercial Loan Rates Affect Investors?

The rates you receive directly impact how much you will cost to buy a property, impacting the key financial metrics such as your Cash Cash Return, Equity Multiple, and IRR.

How can you find the best commercial real estate rates?

There are thousands of commercial mortgage lenders in the United States. The most commonly known commercial lenders are banks and private lending companies. However, several other categories of lenders may be able to provide the most suitable commercial mortgage depending on the property type, size, location, and borrower's business plan.

Other types of commercial mortgage lenders include credit unions, life insurance companies, debt funds, government agencies (like Fannie Mae and Freddie Mac), and commercial mortgage-backed securities ("CMBS").

Soliciting quotes from multiple lenders interested in a commercial real estate asset is the most reliable way to find the best commercial mortgage rate.

How much is the typical down payment for a commercial mortgage?

Down payments for commercial real estate loans are typically between 20% and 50% and will vary based on the loan scenario. Down payments, also known as an investment's Equity Requirement, will be determined by location, type of asset, the experiborrower experience, and investment risk profile's typical minimum down payment for a commercial mortgage.

The minimum down payment for commercial real estate loans is usually around 20% of the purchase price.

What are the closing costs in commercial real estate?

Commercial real estate loans always have closing costs, some of which are regulated by law.

Closing costs include an appraisal, credit reports, real estate attorney fees, title insurance, and recording charges. Commercial mortgage borrowers are usually billed for the lender's real estate attorney, so be aware of negotiating small items in the loan documents that may not be worth revising.

What are the typical fees for a commercial mortgage?

Fees related to commercial mortgage origin may also be assessed at closing and added to the list of closing costs above. Some loans will also require payment of an application fee, an extension fee, or even an exit fee. The loan's Term Sheet will outline a complete schedule and explanation of fees before committing to take out the loan.

Commercial property investors may also be responsible for paying additional settlement agent or broker's commissions in addition to lender origination points (in other words - an upcharge added onto their interest rate).

What is Commercial Mortgage Debt Service Coverage Ratio?

The debt service coverage ratio ("DSCR") determines how much net income commercial real estate properties generate compared with their loan payment. Commercial mortgage debt service coverage ratios vary depending on property use, location, and other factors. Still, most lenders want at least 1.2 times monthly loan payments from total income.

This means that if your property generates an income of $120,000 per month, net of expenses, then a lender may provide a loan that costs up to $100,000 monthly in principal and interest payments.

 

Source: Commercial Mortgage Rates Update

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Selling an Apartment Building FAQ's

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Top Frequently Asked Questions on Selling a Multi-family in Chicago

Are you thinking of selling your multi-family property?

Here are some of the most frequently asked questions we get from clients looking to sell multifamily properties in Chicago.

Before You Sell:

How is selling a multi-family different than selling a single-family home?

If you’ve sold an investment property before, you’ll be familiar with the ins and outs of selling a multi-family. However, if it’s your first time, you’ll learn that the process works differently than it would with a single-family or condo.

A large part of a multi-family’s sale appeal will lie in its cash flow. Buyers looking for a multi-family are looking for more than just a home: they will want to see a property that generates good rental income, rents easily, and provides a financial incentive for them to buy. This could be in the form of easy upgrades they can make to boost rental income or as an empty unit for them to occupy and offset their own living expenses.

Do I need a broker to sell a multi-family?

Of course, we’re biased...but we do recommend working with a broker who is experienced in the multi-family market in your neighborhood. Not only will they be able to pull good comps and provide a market analysis of how you should price the property, but an experienced agent will know how to show the proeprty to different types of buyers, whether they are experienced investors or first-time multi-family buyers who want some supplemental income. Brokers who work in multi-family markets are also in the know about rent prices and trends, which will help them sell your home at the right price.

Do I need to make repairs before selling?

Some buyers look for multi-families with units that could benefit from some updating because they see it as an opportunity to raise the rent using some sweat equity. Your agent should be knowledgeable of the renter’s and buyer’s market for your area and property type and will have good recommendations of what types of updates to make before selling.

Making simple upgrades around the property and in common areas like hallways and entryways can be an easy way to boost the property’s curb appeal that won’t break the bank, whether it’s through new fixtures or a fresh coat of paint.

How do I list a multi-family?

One of the most important parts of getting ready to list your property is confirming the number of legal units in the building. In a city full of old homes like Chicago, many apartment units have been created in old basement spaces or have been de-converted into larger single unit. If you sell your property with an incorrect number of legally recognized units, you could face legal issues down the road. To get the most accurate picture of how your property should be valued and listed, get in touch with the local village to confirm the number of legal units listed in their records.

How should I price my multi-family?

Buyers and their lenders will typically appraise a multi-family home using the income approach method instead of simply using comps in the area to compare values. This means that the appraiser will look at the cost of property maintenance and rental income to evaluate a property’s cash flow. To price your multi-family, you should do appraise a building’s income and use comps in the area to accurately represent what someone might want to pay for it.

How should I market my multi-family?

• You’ll want professional photos of each unit to get ready to list your property, which means asking your tenants to clean their spaces and set up a time for the photographer. Having an empty unit comes in handy because it gives you the opportunity to deep clean the space and potentially even stage it with furniture to show off its potential.
• Put together a financial breakdown and lease abstract to show possible buyers. This might include details like current rents, cost of utilities, and other maintenance fees to give them a better idea of potential rental income.

Selling a building with tenants.

How do I sell my multi-family with occupied units?

One of the trickiest parts of selling a multi-family is to make sure that you are aware of your tenants’ legal rights and that you make the selling process as effortless for them as possible.

• Breaking the news to tenants: Announcing that you’re listing your property for sale isn’t the easiest conversation to have with tenants. For them, it means the hassle of cleaning their apartments for multiple showings, a change in landlords, and a potential increase in their rent after the sale. However, you are legally obligated to inform your tenants when you sell the property, so it’s important to have that conversation before getting too far into the selling process.
• Tenant’s rights when a property is listed for sale: To protect yourself from liability and provide a smooth transition for your tenants during the sale process, it’s important to be aware of their rights determined both by the state and by their lease agreement. Your tenants most likely have a right to be notified a set amount of time before showings and have a lease that can’t be terminated just because you want a vacant unit to sell the property. Reread your lease agreements and the tenant’s rights for your city before listing your home or schedule showings.

How do I show a property with occupied units?

An experienced Broker will know the ins and outs of how to show a property with occupied units (which is one of the biggest reasons why you should take your time to find a good agent). The most important concern when it comes to showing units is to make sure that the tenant is aware of the appointment sufficiently ahead of time. Check your lease agreement to see if there are already guidelines in place, or contact your tenant prior to listing the process to come to an agreed-upon amount of days or hours before the showing when they should be contacted.

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

Request Valuation

 

Source: Selling an Apartment Building FAQ’s

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