There Will Be Feasting At Thanksgiving

Thanksgiving is approaching for owners and investors of real estate in the United States and many are preparing for a feast, but this year will be different from past years.?

Why a difference this year??

Some of those Hunters have become The Hunted and they will be feasted upon instead of feasting.?

In times long since past, many real estate owners and investors exuberantly said “All is fine with interest rates below nine!”.?

For many, many in real estate these days, there is no recollection of prior decades when interest rates dipped below DOUBLE DIGITS for the first time in what seemed like an eternity.?

There was giddiness.??

Today, for a small subset of business and property owners, they took on floating rate debt in the form of a 7a loan from the SBA (Small Business Administration) which for the right purposes can be very effective.?

Unfortunately, many did not consider the upside risk of rising rates and today we hear from many borrowers who are drowning in debt from the interest payments that have breached 11%.?

The same holds true for a portion of owners and investors of real estate who have taken on bridge, mezzanine and other floating rate debt.?

Barring an action to cap the upside risk of rising interest rates, there is NO CEILING for borrowers.?

Borrowers committed to take on debt in exchange for buying, improving and owning assets.?

The lenders make their money by providing funds at a premium to their cost of funds so these borrowers can fulfill their intentions.?

Yet it is not just the borrowers of floating rate debt that are feeling the pain this Thanksgiving season, those who have five and ten-year terms on their existing debt which is coming up for renewal are facing an interest rate environment that looks nothing like the world they once knew when they acquired their asset(s).??

Sticker-shock does not begin to describe the horrific pain that a growing subset of real estate owners and investors are experiencing and that pain is showing up as other opportunistic investors are feeding on the misfortune of a few.??

Unlike the Great Financial Crisis of 2008, where nearly all types and classes of real estate were impacted and experienced varying degrees of distress due to an inability to perform (aka they lost or lacked income generating ability), most assets today are not suffering from an inability to generate income.

Quite the contrary, most assets are healthy and performing.

If those assets are not suffering, why have some Hunters become The Hunted??

Simply because those Hunters are suffering under the burden of their debt, the available cash flow to service their debt is insufficient for the cost of debt in this current environment.?

As we’ve seen from past economic cycles, some of those Hunters have capital in reserve or sufficient resources to fend off the weight of increasing cashflow constraints brought on by higher cost of debt.?

Additionally, some of those Hunters are also assessing their wounds and deciding that it is prudent to cut their ties, aka divest investments now, so that they survive and are positioned for the next uptick in the market.?

Not surprisingly, the quantity of listings and offerings that tout ‘assumable financing’ are growing rapidly.?

Again, is anything wrong with the asset??

In most cases, no.?

The real estate is performing.?

What is not performing??

Ownership.?

So what happens to these assets as The Hunter becomes The Hunted??

Most of the assets will simply be acquired by a new owner in an appropriate timeframe.?

An important reminder:? Real Estate does NOT care who owns it.?

It’s the owners and investors who care, sometimes too much.?

This begs the question: Why would investors buy real estate now and take on the potential (or actual) risk of negative leverage??

More on that topic in the next post.?

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