William McChesney Martin, the ninth chairman of the Federal Reserve, is credited with saying the Fed’s job is to “take away the punch bowl” once the party gets going – that is, to raise interest rates before inflation can take hold. This task often makes the chairman’s position thankless.
After only four months in the job, the current chairman, Kevin Warsh, has already had to act. “The fact is that inflation is too high, and has been for too long,” Warsh declared last week, after the board unanimously voted 12-0 to raise its benchmark interest rate by 25 basis points to a range of 3.75 to 4 per cent. He added: “This summer’s inflation data does not show me that underlying trends have materially improved.” Furthermore, there were indications of another rate hike before the end of the year.
The big question is what impact this will have on a real estate market where certain asset classes have recently performed very well. Joseph Fingerman, President of CRE at Peapack Private Bank & Trust, commented: “Industry wide, this would likely further widen the chasm between well-capitalised sponsors who are able to bring in fresh equity and over-leveraged owners with maturity issues.” For a fixed-rate lender like Peapack Private, this means scrutinising new financings with higher stress tests and stronger debt service coverage ratios.
Many, however, reacted to this move with relative calmness, at least for now. Jay Neveloff of HSF Kramer remarked: “I’m seeing more and more land deals and potential mergers being discussed and worked on. I think for the smart investor who doesn’t want to sit on the sidelines, the opportunity is still there, and I don’t think 25 basis points will be the tipping point.” At Commercial Observer’s annual Institutional Investor & Private Equity Forum, Katie Keenan of Blackstone explained why the environment is favourable for investors: “When you have growing demand and flat or declining supply, that’s hugely impactful to cash flows and growth.” Debt markets, she said, were as healthy as they had been in a long time; capital is readily available and well-priced.
Challenges for Certain Market Participants
Of course, there can be no winners without losers. The rate hike comes at a time when many real estate lenders and borrowers are grappling with previously poorly structured deals. Ryan Koehler, Managing Director of Originations at NewPoint Real Estate Capital, observed: “We are seeing a lot of lender-controlled transactions where equity has been significantly impaired or in many cases completely wiped out.” Lenders are tired of kicking the can down the road and recognise that today’s market is more challenging. They would prefer to deploy capital elsewhere, which is why the willingness to accept losses is greater now than in the last five or six years.
Robust Market Despite Rate Adjustments
Those banking on the underlying strength of the market had the upper hand last week, given some of the deals that closed. In the industrial sector, there were significant transactions, such as the $101.8 million refinancing of an East Coast industrial portfolio by SkyREM or the announcement of a $2.4 billion joint venture between Ares Management and the Canadian Public Sector Pension Investment Board for logistics investments. In residential housing, Airbnb is investing $250 million in new affordable housing and mixed-use projects. In the debt sector, Hines and Rialto Capital launched the new office-focused credit fund, Hines Rialto Credit Partners, which has already secured $1.1 billion in commitments.
In the office sector, promising leasing activity is evident in the right corridors. In West Hollywood, for instance, Cohen Brothers Realty signed seven leases at the Pacific Design Center’s Red Building totalling 96,000 square feet. Large law firms dominated the New York office market landscape: Greenberg Traurig acquired an additional 33,477 square feet at One Vanderbilt from SL Green Realty, and Proskauer Rose secured another 60,000 square feet at SJP Properties’ 11 Times Square, bringing Proskauer’s total space to an impressive 478,000 square feet. In the hotel sector, the historic Bossert Hotel in Brooklyn Heights is being converted into Ritz-Carlton luxury residences, complemented by a Marriott International Hotel. North of there, Bally's secured a $560 million debt package from WhiteHawk Capital Partners for its Bronx casino. Personnel changes also occurred: Steven McKessey moved from Cumming Group to Rudin as Head of Design and Construction, and Michael Eglit left Blackstone Real Estate Debt Strategies to become Head of U.S. Originations at Starwood Capital Group.
