While there is no shortage of discussion on the complications caused by rising interest rates on investment in commercial real estate, a derivative issue from higher rates could actually lead to new opportunities. A large portion of commercial real estate loans are variable rate and require interest rate cap agreements to hedge against increasing rates. Many of these agreements are set to expire soon and the cost to renew is much higher than when rates were lower - 10 times higher in some cases. In addition, where an expiration is still in the distance, some loans require borrowers to escrow substantial funds to help pay for a new cap when the current one expires.
The increased costs to acquire interest rate caps are forcing some hard decisions by borrowers. The options are generally entering into a renewal that will eat up sizeable portions of profits, refinance at a higher fixed rate, or sell the property. If a large portion of property owners elect the latter option, it would create an abundance of inventory with hard deadlines to sell in the near future. This, in turn, should create opportunities for investors with cash to scoop up properties at a significant value compared to recent years.
