TAG Industrial Watch: November 7, 2022
Once again, the Federal Reserve bumped up interest rates on bank-to-bank loans by 75 basis points to an annual rate of 3.75% to 4.00%. Consequently, borrowing costs for commercial properties will surpass 7%, pushing many properties into the forbidden negative leverage territory. Negative leverage is an occurrence in which a property’s final return is actually less than the cap rate after factoring in mortgage costs. Given that the biggest benefit of investing in commercial real estate is the ability to borrow money to increase the rate of return (positive leverage), the current level of interest rates poses a threat to property valuations throughout the CRE world.
With regards to the industrial market, a recent report by Moody’s Analytics shows that the nation’s hottest industry also leads the way with 36% of properties featuring negative leverage returns (Bisnow). In other words, valuations on industrial properties have no choice but to retreat and early signs have indicated that this process is already underway. While the decline has hit big box warehouses more, small industrial properties have actually held up well so far (CoStar). Given that valuations remain near record highs, owner-users of small industrial properties still have a great opportunity to take advantage of a sale-leaseback.
I N D U S T R I A L N E W S
Huge Jump In Negative Leverage For CMBS Loans Bodes Ill For Property Values
Can Rising Rents or Property Growth Make Negative Leverage Worthwhile?
Fed Enacts Fourth Consecutive 75-bp Rate Hike, Signals Slower Pace on Future Hikes
Powell Packs Another Powerful Punch
Industrial Rents Continue to Climb at Robust Pace
R E G I O N A L N E W S
CRE Future Leaders: Tyler Sharp of Marcus & Millichap
State of DFW
Top 5 Industrial Transactions in Chicago
Tesla Rents 440,000 SF Warehouse in San Antonio
U.S. Port Markets See Outsized Industrial Rent Growth, Dwindling Availability