Investing.com -- Commercial real estate buyers are increasingly threatening to abandon recent transactions unless sellers provide better terms, as rising interest rates reshape deal economics.
Investors who agreed to purchase prices earlier this year when financing was less expensive are now seeking price cuts or other concessions before closing. The pressure on deals began when bond yields started to rise in late summer and increased last month after the Federal Reserve raised its benchmark rate by a quarter percentage point and signaled additional increases ahead.
"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 contract signing and sale completion can create substantial differences in financing costs when borrowing rates rise rapidly. Eastham Capital agreed to pay about $20 million for a roughly 200-unit apartment property in the Midwest. Before putting down a deposit, borrowing costs jumped by more than six-tenths of a percentage point, said Matt Rosenthal, the Boca Raton, Florida-based firm's founder and managing director.
Rosenthal convinced the seller to cut the price by $600,000 after threatening to walk away. "It's certainly a different deal now," he said.
"We are working harder to close deals now than we ever have before," said Bobby Werhane, a managing director of Marcus & Millichap's IPA Capital Markets division.
More than $5 trillion of commercial and multifamily real estate mortgages are outstanding, exceeding what Americans owe on credit cards or auto loans combined.
From late August, when rates began rising more sharply, through Friday, the FTSE Nareit All Equity REITs Index fell more than 8%, while the S&P 500 gained 1%, according to real estate analytics firm Green Street.
Data firm Trepp reported that in August, 11.42% of mortgages packaged into commercial mortgage-backed securities were being handled by special servicers, the highest rate since February 2013.
In June, real estate firm Medalist Diversified agreed to sell a 65,000-square-foot retail property in Greenville, South Carolina, for about $10.2 million. As rates rose during the summer, the buyer sought a price cut. After negotiations, Medalist agreed to reduce the price by $100,000, and the deal closed in September "due to the potential impact of the interest rate environment," said Chief Financial Officer C. Brent Winn Jr.
A bank participating in a $45 million construction loan for a more than 90%-leased retail center in North Carolina pulled out because of market conditions. Marcus & Millichap found a replacement lender.
"There's just much more friction in the market," said Werhane.