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In Commercial Property Executive, Robert Mangrelli discusses how the capital markets are reacting to higher interest rates

Date:
July 6, 2022

Summary

In a Q&A with Commercial Property Executive, Robert Mangrelli examines how the Federal Reserve's recent interest rate hikes are changing the landscape of commercial real estate's capital markets.

External data shows transaction volumes are slowing from what was a torrid pace, with price increases moderating. Rising interest rates and tighter financial conditions, coupled with heightened uncertainty over the path for economic growth and inflation, almost certainly had an impact here.
Commercial Property Executive Q&A

Article excerpt

Impacts of the Federal Reserve repeated interest rate hikes are reverberating across the real estate capital markets. To make some sense of the new landscape, Commercial Property Executive reached out to Rob Mangrelli, managing director of Chatham Financial hedging and capital markets team. He has been with the company for more than 15 years and is currently leading a team advising private equity real estate clients on interest rate and foreign currency risk management strategies.

The Federal Reserve increased its benchmark interest rate by another 75 basis points in June. How is this affecting commercial real estate?

Mangrelli:
Given that commercial real estate is an asset class that is inherently capital intensive, it is dependent on credit to help finance the acquisition or construction of commercial real estate assets. Higher yields on risk-free instruments, including the policy rates set by the Federal Reserve, act as a reservation rate for all providers of capital, both debt and equity investors alike, and influence financial conditions. The increases in policy rates augment the cost of debt and equity capital for real estate, and such a rapid repricing in yields will cause a period of readjustment in lending markets. In addition to the impact of the Federal Reserve’s rapid increases in their policy rates and the rapid repricing of the Treasury yield curve over the course of 2022, the impact of higher rates and the general uncertainty over several macroeconomic factors, chiefly inflation, is leading to higher risk premia, including widening of credit spreads.

Our interest rate risk expertise

Interest rate risk can be an important factor in the performance of a single real estate asset or a portfolio of properties. Chatham’s interest rate risk management advisory services offer the expertise and knowledge you need to make informed decisions about the type of debt you use and how you manage the interest rate risk associated with that debt, whether it’s risk on current floating-rate debt, refinance risk on fixed-rate debt, or risk on prepayment penalties.

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