Chicago developer David Scherer’s rate swap play pays off big

As rising interest rates squeeze some commercial real estate investors, one in Chicago made millions off the surge in borrowing costs — without becoming a lender.

David Scherer led his firm, Origin Investments, to buy a type of derivatives contract most commonly used by hedge funds and large financial institutions to balance the risk of investments, the Wall Street Journal reported. Smaller, privately held property developers rarely play the market this way with rate swaps, which allow the parties in a contract to limit their exposure to future interest rate fluctuations in debt markets.

“Most developers are not thinking like that,” Steven Buchwald, senior managing director at Institutional Property Advisors, told the outlet. “You would need the capital and you would need the conviction that rates were going to rise, and rise significantly.”

Scherer’s firm bought $18.5 million-worth of interest rate swaps in January 2022, despite some members of his firm’s investment committee initially saying the idea was crazy.

Not long after that, the Federal Reserve started aggressively raising interest rates to counter inflation with the 10-year Treasury yield rising by more than 1 percent. That increased the value of Scherer’s bets as he was able to sell them in July for more than $46 million.

Scherer’s risk more than doubled his firm’s money, netting a $28 million profit.

Despite the potential of costing the firm, Scherer said he wanted a way to hedge against higher rates on loans he would soon need to take out for developments he was planning. “I want to try to hedge things I can’t control, so I can focus on the things I can,” Scherer told the outlet of his strategy.

The profit from the interest-rate bet will help Origin pay for today’s higher costs of construction loans than those in place a year ago. The firm has plans to break ground on a 720-unit apartment complex in Nashville for which Origin will have to borrow $150 million.

Scherer is trying to repeat his success. When rates dipped a little over the summer, he bought more swaps that he still owns.

— Victoria Pruitt