High interest rates create unexpected opportunities for CRE investors.

At a Glance —

• Commercial real estate has been recently plagued by a market with significantly escalating capital costs alongside declining property values and falling demand for space
• This landscape, while troublesome for many CRE property owners, creates outstanding opportunity for investors
• Targeting high-quality properties with strong fundamentals and income-generating potential will allow savvy CRE investors to capitalize on the intrinsic value of the asset

In the complex landscape of commercial real estate, the relationship between debt structures and interest rates holds a pivotal role, often dictating the strategies and fortunes of both owners and investors. The current state of the CRE market is marked by maturing commercial real estate debt — estimated by the Mortgage Bankers’ Association at $1.4 Trillion this year and next¹. However, within this market challenge lies a spectrum of opportunity for savvy CRE investors.

Understanding the Dynamics

Commercial real estate debt encompasses the financial obligations associated with investing, owning and managing commercial properties. High interest rates within this sphere present a series of challenges, including significantly increased borrowing and refinancing costs.

This must also be considered alongside the reality of potential reduced CRE property values. Vacancy rates are up and US office space values were down by a whopping 21% in October, 2023 compared to the year prior according to real estate analytics firm Green Street².

Leveraging Opportunity

Given this backdrop — the higher cost of capital alongside declining property values and falling demand for space — let’s look at the investment opportunities that are being created.

Distressed asset acquisition
Cost prohibitive refinancing options cause existing owners to find alternatives, presenting an opportunity for investors to acquire properties at lower valuations. These undervalued assets can become lucrative investments when managed and repositioned effectively.

Value enhancement strategies
Savvy investors can also leverage high-interest environments to implement value enhancement strategies. At SageStreet we work with proven operators who focus on renovation, repositioning and improving operational efficiencies to elevate property values and cash flows, helping to maximize returns to investors.

Long-term vision and stability
Investing in commercial properties for long-term income and stability can offset short-term fluctuations caused by high interest rates. Investors with a patient approach can ride out the waves and benefit from the inherent resilience of well-managed CRE assets.

A final word from our Managing Director, Harris Junell —

Here at SageStreet, we’re seeing more deals today than we have ever seen before. With the capital markets dislocation we’ve referenced in this article, there is a significant increase in quality deals coming forward. This surge in available properties is due to rising interest rates which is compelling investors to sell.

Consistent with our investment philosophy, we continue to be extremely selective. We are not looking for distressed assets or tremendously discounted deals with a distress story. Rather, we will continue to seek the highest-quality assets — those in prime locations with great management teams and at a good value.

Accordingly, we are pretty excited about the opportunities and potential in CRE market investing as we begin 2024. The market conditions are providing an excellent opportunity to achieve promising yields for our SageStreet investor community.