The Fed, Funds and CRE Financing


In March 2022, the Federal Reserve approved its first interest rate hike in more than three years. Since that time, much has been written about the impact of ongoing Effective Federal Fund Rate increases on commercial real estate financing.

Stephen Bittel

In the wake of the most recent EFFR increase, experts told Connect CRE that there is no doubt that continued hikes are impacting commercial real estate funding. Reliable sponsors can still obtain bank and life insurance company debt. But “nearly all of the Wall Street-type loan funds that rely on lines of credit or repurchase agreements are effectively out of new business without admitting it publicly,” said Stephen Bittel, founder and chairman of Terranova Corporation. Meanwhile, he continued, lenders are focusing on near-term renewals and stress-testing existing loans at renewal rates from 5.5% to 6.5%, “well in excess of loan rates from the last few years.”

Meanwhile, Chad Plumly said that while his company, Matthews Capital Markets, doesn’t rely on the Fed rates when it comes to financing, the hikes are impacting the overall markets. “In turn, treasury rates and term SOFR rates have increased significantly,” said Plumly, who is First Vice President with Matthews Capital Markets. Additionally, “borrowers seeking short-term floating rate or construction financing are finding it relatively more difficult than those seeking long-term financing,” said



What To Expect For The Second Half Of 2022 In Commercial Real Estate With Stephen Bittel

KHTS – August 17, 2022

With the recent announcement by the Federal Reserve of a 75 basis point raise in its benchmark interest rates, yet another variable has been thrown into the mix when it comes to trying to decipher what the future holds for commercial real estate. Although the hope for everyone is that this increase will work to cool the economy and bring down inflation, supply chain issues, the war in Ukraine, continued disruptions as a result of the Covid-19 pandemic, and oligopolies taking advantage of the situation continue to make the fight against inflation an uphill battle. As rumblings of a potential recession grow louder, financial uncertainty will continue to change the actions of consumers and lenders alike, leaving markets in flux and forcing us to brace for the unknown.

In the face of this disquietude, the best thing business owners and investors can do is play close attention to the shifting trends in their respective markets. For Stephen Bittel, founder and chairman of the real estate and private equity investment firm Terranova Corporation, changes to the commercial real estate landscape can still present significant opportunities for those able to take advantage of them. Bittel has over 40 years of experience in commercial real estate, starting his company with a single commercial property investment and growing it to an institution in Southern Florida that has served as the exclusive agent for more than $5 billion worth of commercial projects.

Over the course of his four decade career Bittel and his company have navigated their way through a number of economic downturns. Below, we explore with him the direction the commercial real estate market appears to be heading for the rest of the year, as well as the potential larger implications these trends could have on the sector at large.

Federal interest rates will put more pressure on the industry

According to the Federal Open Market Committee, high inflation in combination with job gains, broad price pressures and the Russian invasion of Ukraine were behind its decision to again raise interest rates. While this most recent hike should not have come as much of a shock to those within the commercial real estate sector, it has created additional pressure on a market that has already seen a pronounced decline in transaction volume in the first and second quarter of 2022. Additionally, the inability of those who invest in commercial real estate to accurately determine market value of assets due to uncertainty around debt capital markets will induce caution amongst many investors, choosing to hold back on potential investment opportunities. Until there is more perceived stability, this trend will likely continue.

Bittel told the commercial real estate news website that a bid/ask gap is another factor behind the slowdown in sales activities. According to him, there is an impasse due to sellers wanting the price for the asset they were able to get last year while buyers are expecting a discount due to the higher cost of debt capital. When it comes to development, the higher cost of debt will further hurt development deals that were already facing higher construction costs due to supply shortages.

Banks are pulling back on loan issuing

Coupled with the problems to the market caused by interest rate increases is banks seeking to conserve capital and limit risk by refraining from issuing loans. Stricter credit requirements are seeing a smaller percentage of business owners eligible for loans, preventing progress and putting many commercial real estate investors without available  capital in a tough spot. According to the data firm Trepp Inc., in the first quarter of 2022 banks issued $29 billion of securities backed by real estate loans, compared with only $20.6 billion in the second quarter.

Trepp also noted that after the large increase reported in the consumer price index by the Labor Department in June sentiments about the market have only gotten worse, with banks issuing less than half of the volume of collateralized-loan obligations that month when compared with February, down from $8.9 billion to $3.6 billion.

The “mass exodus” from urban centers has slowed

Commercial real estate trends tend to follow residential by 12 to 18 months, so it is important to take note of the state of the multi- and single-family markets when trying to anticipate what lies ahead. Multi-family sectors have recovered for the most part from the Covid-19 pandemic, reaching 4.6 percent vacancy rates in the third quarter of 2021 according to a market report assembled by Lee & Associates. Large cities such as Los Angeles and New York have similarly seen vacancies for multi-family properties return to pre-pandemic levels, and as the price of single-family homes continue to grow higher there has been an increased demand for larger rental units in urban centers that have the ability to accommodate remote work.

Conversely, sales of newly built homes have started to taper off due to rising mortgage rates. Freddie Mac has reported the average fixed rate mortgage has risen over two percent since the beginning of the year, from 3.1 percent to 5.23 percent. As rates and prices continue to climb, the rental market has seen a boost by those now priced out of home ownership at the moment.

Industrial assets are stars

In a presentation to Florida International University’s business real estate students, Bittel told them that the Covid-19 pandemic has flipped the commercial real estate market on its head. What was once an advantageous investment category today has minimal value, and categories that nobody saw coming have become hot commodities. Just as multi-family developments in key markets across the country are proving to be advantageous for institutional investors, so too are industrial assets according to Bittel. With the boom of online retail that is showing no signs of slowing, e-commerce distribution centers are doing very well, and self-storage facilities are in high demand as the pandemic caused many to rethink their current living situations.

The retail market is facing many challenges

However, while distribution centers for e-commerce may be seeing a boom, retail is suffering from the decrease in demand due to newly created online shopping habits as a result of the Covid-19 pandemic. Supply disruptions have not helped the matter, nor have rising labor costs or increased expenses as a result of inflation. Combined, these factors have led to a decrease in foot traffic that has made the retail market higher risk.

According to Bittel, it is retailers that were able to evolve that have been able to succeed in the face of these difficult conditions. Although as an investor he believes retail properties are messy, he told the students at Florida International University that suburban malls with supermarket anchors did well throughout the pandemic, and restaurants that adapted quickly to implement takeout and delivery options are often now making more money than prior to Covid-19 as a result.

Plan accordingly

Understanding the ebbs and flows of the market has rarely been as difficult as it is right now, but for those who were able to prepare for inflation and a potential recession don’t have to spell doom and gloom. In the fourth quarter of 2021 Bittel’s Terranova Corporation refinanced roughly $150 million of its properties, and according to Bittel the company has since been putting its balance sheet to work. The company has actively focused on making opportunistic acquisitions of distressed debt and equity, and business owners and investors should take a leaf out of Bittel’s book by keeping a close watch on capital markets.



Fed Funds and GDP Through the CRE Lens


This week’s economic news packed an expected, but no-less-severe one-two punch.

On July 27, 2022, the Federal Reserve hiked the effective federal funds rate (EFFR), adding to the increases made in March, May and June of this year. And less than 24 hours later, the Bureau of Economic Analysis reported that the U.S. economy contracted for the second straight quarter, with GDP falling 0.9% at an annualized pace for the period.

The question that keeps being asked is how this ongoing economic news affects commercial real estate. By way of answer, experts tell Connect CRE that commercial real estate isn’t unscathed from the ongoing economic headwinds. But they also explain that thoughtful planning, de-levering, intelligent capital strategies and appropriate asset allocation can help move the industry—and its owners and investors—through a shaky economic future.

So, What’s Going On?

First of all, yes. Current volatility has been, and continues to, exerting its influence on commercial real estate. For one thing, deals are slowing down. Darren Pitts, executive vice president with Velocity Retail Group, said that large land deals for residential developments are falling out of escrow for the first time in years, while increasing interest rates are putting would-be homebuyers on the sidelines. This could be a problem, due to the “retail follows rooftops” adage. And across both residential and commercial real estate, “increased land costs, increased construction costs and now increased buyer financing costs are proving to be a difficult trifecta of problems to overcome,” Pitts acknowledged.

Meanwhile, the rising interest rates are putting downward pressure on overall property values. “Since March, the RCA CPPI All-Property Index has already reported three consecutive months of decelerating price gains across a variety of asset types,” said Gary Bechtel, CEO of Red Oak Capital Holdings.

Then there is the ongoing disconnect between buyers and sellers, with the widening spread between bid and ask. “Sellers are seeking the price that was attainable last year, while buyers expect a discount because of the higher cost of capital,” observed Terranova Corp.’s Founder and Chairman Stephen Bittel.

But Is the Sky Falling? Not Necessarily

While commercial real estate is a single industry, it pays to remember that it’s a hugely diverse one. Chelsea Mandel, co-founder and managing director of Ascension, acknowledged that investors and owners who placed mortgage-level financing on assets are definitely experiencing increasing costs of capital. “But there are tons of all-cash buyers, including private 1031 investors, that are somewhat insulated, at least, from shorter-term spikes,” she pointed out.

Along the lines of de-levering in favor of more liquidity, Bittel said Terranova had refinanced its portfolio in late 2021 to have the capital to jump on potential deals that make sense. “Our strategy has definitely shifted to focus on distress opportunities,” he said.

On the other hand, CONTI Capital is maintaining its current strategy and focus on Class A multifamily properties in the Sun Belt. “We remain extremely active in the market, seeing great opportunities offered at a discount, compared to only a few months ago,” said Carlos Vaz, CONTI’s founder and CEO.

And Mandel said her company is seeing an increase in sale-leaseback transactions, as business owners sell their real assets to pay down their debt or boost cash reserves. “(Sale-leasebacks) continue to intrigue business owners. Especially with higher mortgage rates, the relative attractiveness of a sale leaseback becomes even more enticing when business owners consider their alternative for financing company owned real estate,” she said.

While economic uncertainty can prompt investors and owners to stay on the sidelines until things calm down, Bechtel said this simply isn’t a realistic stance. “The maintenance and operation of commercial assets can’t always be paused,” he said, “and capital can’t be sidelined forever.” Even in the current uncertainty, property owners and managers need to find ways to move plans forward, while capital providers need to find “the appropriate opportunities to place money, as their investors seek to generate higher yields,” Bechtel said.

Gazing into the Crystal Ball

Predicting the future can be difficult, and that’s especially the case with what’s happening. Velocity Retail’s Pitts believed that the “constant rate hikes will definitely be a drag on the national economy,” while Vaz took the opposite stance, that the economy, overall, is “in a relatively strong position to withstand the current pace of interest rate hikes.”

But the experts were unanimous that real estate is likely in a good place, even as the consumer-led economy continues faltering.

Bittel explained that experienced, well-capitalized owner-operators should do well, depending on their asset allocations. And, as always, the asset type matters, too. James C. Bieri forecasted that the office sector will be negatively impacted, as will new home builds. “Multifamily remains intense, industrial will take a breath from the breakneck pace to expand and malls will be hurt as they sell discretionary goods,” said Bieri, who is principal with Stokas Bieri Real Estate. Velocity’s Pitts allowed that retail is likely to suffer as consumers switch product spending to higher energy costs, but “look for some of the value retailers to shine again like they did in 2009-2012, providing more value to the customer.”

Meanwhile, Red Oak’s Bechtel indicated that borrowers are examining different capital offerings they might not have considered in the past, such as collateralized loan obligations (CLO) for securitized bridge offerings. Even as CLO spreads are impacted, “fixed-rate bridge lenders have become more attractive to both borrowers and investors,” he said.

Ang acknowledged that real estate, as an industry, is likely to take a short-term dip in the case of a recession, but “it’s too valuable of an asset to stay down for long,” he said. Bieri agreed, adding :“there still remains a lot of capital looking for a return. Long-term, real estate is a good place to seek return.”