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  • Writer's pictureKyle Nagy

CRE Pricing

CRE pricing falls, interest rates rise, bad time to buy and finance? What does this mean for Commercial Real Estate Investors and Professionals? Let’s look at the math.

"The Green Street Commercial Property Price Index decreased by 1.4% in February.”

Yes, another month decline, but how does year over year look?

“The all-property index has fallen 15% from its March 2022 peak, while the index tracking properties in core sectors is down 18%.”

Let’s stop there and consider a purchase and finance model.

Based upon a 750,000 NOI, 6% Cap Rate, 70% loan to value, 25-year amortization, and a March 2022 rate of 3.95% rate, the property would generate a 5.30% cash on cash return. A very common structure for March 2022.

Now, let’s reduce the purchase price by 18% while assuming the same NOI, 70% loan to value, 25-year amortization and plug in the March 2023 rate of 5.96%. The cash on cash return actually went up to 6.42%.

What is stopping investors from buying, risk, not interest rates. Buyers perceive more risk in the marketplace and therefore request greater price reductions and higher cash on cash return.

What do the researchers say?

“Property prices are fighting against higher interest rates at both ends of the yield curve, and that’s a battle they’re not going to win… unless we get some rate relief in the fixed-income markets it’s likely we’ll see further declines.”

Contributed by Kyle Nagy, President

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