Despite Mixed Signals & Warning Signs, Commercial Real Estate Investors Press On
Financial markets tend to react unpredictably when faced with mixed signals, and commercial mortgages are no exception.
Competing signs in recent weeks include a lackluster May employment report (pointing to a weaker economy), and Federal Reserve Chairman Ben Bernanke indicating that he still views inflation (or an overheated economy) as a serious threat. The result has been quite a bumpy ride in the U.S. stock and bond markets.
U.S. Treasury bond yields have ranged significantly, but have fallen over the past 30 days, bringing Florida home loan rates down slightly with them. The Barron’s/John B. Levy & Co. National Mortgage Survey, a gauge of commercial lending activity, showed that commercial mortgage rates are now in the 6-6.15 percent range for 5- and 10-year loans.
Real estate has become a favored investment class in recent years and remains so even in these turbulent times. But storms are on the horizon.
Rising interest rates have pushed fixed-rate mortgages up more than 1 percent since June 2005, which is a trend that could make commercial real estate values suffer.
The interesting dynamic here is that with all the talk of a downturn, property values are not suffering because so much money is clamoring to get in. Pressure is building. A recent Wall Street Journal article described a short video circulating on the Internet showing a Hong Kong bus incident.
The video, which is becoming the Zeitgeist for these times and has been dubbed “Bus Uncle,” is named for the elderly man captured on film berating a younger man who had asked him to keep his cellphone conversation down. The essence of the scene was “I have pressure, you have pressure.”
The phrase could easily describe real estate investors pressing things to the limit and fighting a few trends against them. Rising rates are clearly the single largest factor pressuring deals, while a second, lesser-followed pressure point is the rise in insurance premiums, particularly in coastal areas.
The start of hurricane season has brought renewed attention to the damage and destruction of coastal properties in the past few years and the havoc insurance companies felt as a result. Property owners are getting bills which some describe as crazy. One owner spoke of a sevenfold increase in premiums for a major property in Florida.
Another West Coast-based national real estate developer that purchases and develops apartments in Florida indicated that:
- It cannot buy Florida real estate properties that are stick built.
- It can only buy properties in Florida after selling others under their blanket policy.
- Although it will probably blow over in a few years, underwriting insurance premiums is a challenging and risky business that puts pressure on their projections and could reduce values (sellers have not reduced their value expectations, however).
More than just people in the coastal areas will feel the pressure of rising property insurance premiums. In addition to tax dollars that go to support hurricane victims, commercial real estate owners can expect premiums to rise as companies seek to make up for losses in coastal areas by raising rates in less risky areas.
