Meet the New Normal in Commercial Real Estate Investment
For most of the last 15 years, the real estate and real estate capital markets have benefited from crisis management. The Federal Reserve, by keeping interest rates very low and generating demand, ensured asset valuations could keep climbing. Recently, in reversing course and sharply raising the federal funds rate, however, it has signaled that its assistance has a limit.
As a new normal comes into view, many real estate sponsors and investors will revisit their capital strategies to adjust accordingly. More flexible financial arrangements such as preferred equity and mezzanine financing can help vent the pressure building on assets that were financed at low rates and higher values. If sponsors, investors and lenders can step up cooperation and postpone exit plans to better position projects for changing conditions and opportunities, perhaps more severe outcomes can be avoided.
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