In June of 2017, the Federal Reserve hiked interest rates .25%. The objective is to curb inflation and maintain a healthy rate under 2%. As market outlooks remain strong, the Federal Reserve Chair, Janet Yellen, has indicated that further rate increases will be rolled out throughout the year.
While it’s impossible to predict future changes or increases, many financial analysts are anticipating a continuation of rising rates. For commercial real estate investors, rising rates may require unique or creative financing. Several options for purchasing, refinancing, or investing in commercial real estate are still available to borrowers.
Conventional Lending vs. Hard Money Lending
Conventional and hard money lenders adhere to different regulatory standards and will be affected by Federal Reserve interest rate hikes in different ways.
Conventional lenders, such as Fannie Mae and Freddie Mac, have strict guidelines on determining qualified borrowers. For investors who have experienced a previous bankruptcy or other financial difficulties throughout their career, conventional lending is likely not a possibility.
In contrast to conventional lending programs, hard money lending boasts much higher flexibility in evaluating borrowers and properties. Most hard money lenders, like Bloomfield Capital, raise private equity and determine loan qualifications, interest rates, and other parameters internally. Interest rates are typically set on a case by case basis and are impacted by the specifics of the deal, not by changing government regulations. Borrowing from a private equity fund for commercial real estate acquisitions or refinances is a strategic option for investors with unique scenarios or urgent projects.
Rising Interest Rates vs. Capitalization Rates
Real estate investors or lenders use capitalization (cap rates) to translate real estate cash flows to a property valuation. While a rising net operating income (NOI) is correlated with higher property values, a rising cap rate is inversely correlated with property values.
The U.S. Treasury bonds serve as the benchmark when assigning cap rates to a given area. The difference between the cap rate and the Treasury bonds is an additional expected return to compensate investors for the additional risk they incur when investing in real estate assets over the U.S. Treasury bond.
It is a common assumption that a rise in the 10-year Treasury rate results in higher cap rates and lower property values. However, the correlation between Treasury rates and cap rates has been historically faint. Other factors like credit availability and the supply and demand in the market seem to have an additional impact. Thus, it is hard to anticipate exactly how cap rates will respond when interest rates are rising.
Variability is the only constant in the real estate investing space, but if borrowers are seeking a reliable capital source with less stringent evaluation criteria, working with private lenders like Bloomfield Capital is a smart option. Access to discretionary capital and the ability to underwrite loans in-house continue to be key factors that distinguish Bloomfield Capital from the majority of our peers.
Experience investing across national markets, spanning both rural and metropolitan geographies, allows our platform to be selective and diversify our exposure. Depth of diligence coupled with execution speed and creative financing solutions are a rare combination of characteristics that allow our platform to capitalize on unique opportunities across the commercial real estate landscape.
