TAG Industrial Watch: January 28, 2023

At the peak of the Housing Bubble during the early 2000s, nearly 37% of new mortgages carried an adjustable rate (Yahoo! Finance). When interest rates shot up, mortgage payments followed suit, and many of those homeowners dumped their properties on the market, helping to ignite the 2008 Housing Crisis and the Great Recession. Today, the actors are different but the plot remains the same.

In recent years, up to a third of all commercial property debt carried floating interest rates. Just in case rates fluctuate higher, banks usually require borrowers of these loans to take out insurance that would cover interest costs over a certain level. But with the Federal Reserve raising short-term interest rates from nearly 0% to 4.5% last year, the premiums on interest rate cap insurance have unexpectedly skyrocketed. For example, in 2020, at a cost of just $22,000, a San Antonio apartment owner bought insurance on a $24.4 million loan that protected the landlord from interest expenses if rates moved above 5%. However, with the prime rate now at 7%, the landlord expects the premium to rise to about $1 million when the insurance renews in the fall, which is equivalent to 40% of the property’s annual net income (Globe St.).

Many property owners facing a drastic increase in interest rate cap insurance this year may simply choose to sell their property, putting further pressure on property valuations. Akin to the 2008 Housing Crisis, the seeds of a crisis in commercial real estate have already been sown. For small industrial owners, the good news is that interest rate cap insurance was mostly purchased by owners of large multifamily properties and warehouses. In the event of a crisis, the odds should favor small industrial owners.

I N D U S T R I A L   N E W S

Expiring Interest Rate Caps To Fuel Distressed Property Sales
Globe St. – January 23, 2023
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Brookfield REIT Returns Down For Second Straight Month
Bisnow – January 19, 2023
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E-Commerce Growth Still Drives Industrial Demand
Commercial Property Executive – January 17, 2023
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Will Rising Interest Rates And Surging Inflation Spell Trouble
For The Sector? Not According To SparrowHawk

REJournals – January 24, 2023
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Holiday Sales Fall Short Of Expectations,
Set Stage For Tougher 2023 For Retailers

CNBC – January 18, 2023
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R E G I O N A L   N E W S

Tesla to Expand Its Austin Giga Texas Facility
Connect CRE – January 13, 2023
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Kansas City’s Hunt Midwest Wraps Construction
Of 476,280-Square-Foot Logistics Center

REJournals – January 20, 2023
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Prologis: Texas Will Be The Top State For Warehouse
Net Absorption And Other 2023 Predictions

Globe St. – January 12, 2023
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West Siders Demand Answers After Amazon Delays Opening
Of Massive Warehouse Bringing 500 Jobs

Block Club Chicago – January 20, 2023
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Tesla Posts Job Openings For Proposed
Lithium Refinery In Nueces County

Caller Times – January 9, 2023
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