The Federal Reserve provided welcome news to commercial real estate owners last week when it cut short-term interest rates by half a point. But for some, the reprieve proved to be either too little or too late.
A class of commercial real estate owners won’t be able to save their properties despite last week’s shift in monetary policy, the Wall Street Journal reported. Owners who are highly-leveraged or locked into floating rate debt are still facing trouble, especially as banks under pressure from regulators ease up on commercial lending.
For many, the bad timing is the harbinger of doom. In Downtown Chicago, developer Daniel Moceri completed a 20-story office tower weeks before the onset of the Covid-19 pandemic. As the property struggled, the interest rate on a loan backing the property soared to 10 percent. By July, Moceri had lost the building.
The bad timing was particularly acute for those who thought they were scoring the deal of a lifetime, locking up loans when interest rates were at critical low points early in the pandemic. That was the case for Ashford Hospitality Trust, a Dallas-based hotel owner that seized on floating-rate debt.
When interest rates shot back up, the value of Ashford’s hotels collapsed below the total debt backing the properties. The firm needed to start selling back many of its properties to pay off its debt.
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Other companies that seized on floating-rate debt and became highly-leveraged are stuck feeling the pain, even with the Fed seemingly back in their corner. Tides Equities bought dozens of multifamily buildings in the Sun Belt and took advantage of floating rates for loans, planning to renovate properties and raise rents to turn a profit.
But interest rates soared and rent growth leveled out. Suddenly, tenants couldn’t pay Tides in full and the company couldn’t necessarily keep up on its debt. Tides’ widespread struggles have made it hard for the company to land rescue capital, something that may not change even with rates slashed.
For many owners, the impact of the Fed’s decision remains to be seen as loans mature.