Interest Rates and Investment: Evidence from Commercial Real Estate

2016 ◽  
Author(s):  
Liang Peng ◽  
Thomas G. Thibodeau
Keyword(s):  
Real Estate ◽  
Interest Rates ◽  
Commercial Real Estate

The Trouble with Lenders: Subtleties in the Debt Financing of Commercial Real Estate

2016 ◽  
pp. 1-14
Author(s):  
Craig Furfine
Keyword(s):  
Real Estate ◽  
Interest Rates ◽  
Private Equity ◽  
Commercial Real Estate ◽  
Strategic Decision ◽  
Holistic View ◽  
Operating Income ◽  
Final Property ◽  
Retail Shopping ◽  
Management Issues

With interest rates near all-time lows in late 2015, Stanley Cirano knew it was an opportune time to consider the financing on his portfolio of commercial real estate. Cirano Properties was the general partner on three separate private equity investments of retail shopping centers in suburban Chicago. The first, Brookline Road Shopping Center, had been acquired in 2006 and had been managed through the financial crisis and real estate downturn. The property was performing well and Cirano wondered whether it made sense to refinance or sell. The second property, Columbus Festival Plaza, had been acquired in a 2010 bankruptcy auction. Although the property had needed a good amount of capital improvements, Cirano was proud of the growth in net operating income he had been able to generate. The final property, Deerwood Acres, had been developed by Cirano himself after acquiring the property in 2013 from the previous owner, who had been operating a go-cart track and drive-in theater on the land. Cirano expected great things from the property, though his lease-up had been slower than anticipated. Although the three properties had different levels of performance and presented different management issues, they all shared the fact that they were all significantly financed, in part, with debt. As the properties were acquired at different times, Cirano had simply selected what seemed like reasonable financing at the time. With his concern that interest rates would soon be rising, Cirano thought it made sense to take a holistic view of his portfolio, consider what debt options were available to him, and make a sound strategic decision on the financing of all his assets at the same time.

scholarly journals Commercial mortgage lending: standardization issues

2020 ◽  
Vol 2020 (2) ◽  
pp. 100-106
Author(s):  
Aleksandr Evgenievich Ushanov
Keyword(s):  
Real Estate ◽  
Best Practices ◽  
Interest Rates ◽  
Mortgage Lending ◽  
Commercial Real Estate ◽  
Commercial Property ◽  
Banking Business ◽  
The Russian Federation ◽  
Business Process Quality ◽  
Commercial Mortgages

The article states that a loan secured by commercial property (commercial mortgages), as one of the most popular types of corporate loans has a number of advantages compared to other types of borrowing: the borrower is able to quickly get the necessary amount of money for any need - business expansion, working capital, ability to Finance large deals, and the disposal of banks remains liquid assets, quick sale which will cover damages in case of default by the cus-tomer of the terms of the loan. It is confirmed that the product is characterized by specific risks, often resulting in refusal of credit or their manifestations in the course of servicing the debt: unac-ceptable for the lender level of capitalization and liquidity of the collateral, the degree of occupan-cy of commercial real estate and the level of indexing of interest rates on leases; rental impropriety of the object for commercial use; encumbrances accept collateral in other liabilities etc. It is noted that one of the ways to improve the process of commercial mortgage lending in order to reduce transaction risks is its standardization. In the Russian Federation, the Association of Russian Banks is developing banking standards, which to date has approved more than fifteen standards (most of them are banking business process quality standards and methodological documents). It is pro-posed to develop a Standard for the lending process secured by commercial real estate; a matrix of requirements for the components of this process is provided, reflecting the best practices of leading Russian banks working in the field of commercial mortgages. In using the Standard, stakeholders are both credit institutions and borrowers.

A Tale of Two Properties: Debt Strategies for Financing Commercial Real Estate

2019 ◽  
pp. 1-19
Author(s):  
Craig Furfine
Keyword(s):  
Interest Rate ◽  
Real Estate ◽  
Interest Rates ◽  
Commercial Real Estate ◽  
Debt Financing ◽  
Shopping Centers ◽  
Opportune Time ◽  
The Interest Rate ◽  
Retail Shopping

Stanley Cirano owns two retail shopping centers in suburban Chicago. With interest rates near all-time lows in late 2015, Cirano believed it was an opportune time to consider the debt financing of his properties. Although the properties were similar in many respects, the lenders willing to lend against each property were offering noticeably different terms. Cirano had to consider not only the interest rate and size of each potential loan, but also the various fees, potential prepayment penalties, and variations in recourse to make the best decision for each property.

The Right of Acquisition: Options in Commercial Real Estate

2017 ◽  
pp. 1-10
Author(s):  
Craig Furfine ◽  
Mitchell Petersen
Keyword(s):  
Real Estate ◽  
Interest Rates ◽  
Real Options ◽  
Fair Value ◽  
Commercial Real Estate ◽  
List Type ◽  
Discounted Cash Flow ◽  
Real Options Theory ◽  
The Real Estate ◽  
The Right

In April 2012 Bill Nichols, a financial analyst at the real estate investment firm Koenig Capital, was about to enter a unique lease renegotiation. One of Koenig's tenants, Hasperat Inc., had sixteen years left on its long-term lease of the Kelley Building, a 165,000-square-foot office building in downtown Cleveland. The lease contained a clause giving Hasperat the option to buy the Kelley Building from Koenig. When Nichols tried to place a mortgage on the property to take advantage of low interest rates, he learned that the existence of this option in the lease contract prevented lenders from offering Koenig their lowest rates. As a result, Nichols had been tasked with renegotiating the lease to remove the option clause. This unexpected event offered Nichols the opportunity to use his financial skills. He needed to calculate the fair value of the purchase option to be able to justify to his superiors by how much they should compensate Hasperat. Students will step into the role of Bill Nichols and apply real options modeling techniques to value the purchase option in Hasperat's lease.After reading and analyzing the case, students will be able to: Apply real options theory to the valuation of a purchase option in a commercial real estate lease Identify the common mistakes in applying traditional discounted cash flow (DCF) analysis to financial problems with option components

scholarly journals Commercial Real Estate at the ZLB

2018 ◽  
Vol 13 (1) ◽  
pp. 32-53
Author(s):  
Bjørnar Karlsen Kivedal ◽  
Trond Arne Borgersen
Keyword(s):  
Interest Rate ◽  
Real Estate ◽  
Interest Rates ◽  
Systemic Risk ◽  
Net Present Value ◽  
Weighted Average ◽  
Commercial Real Estate ◽  
Federal Funds Rate ◽  
Evaluation Models ◽  
The Difference

This paper analyses the implications of a low interest rate environment (the zero lower bound – ZLB) for the demand of commercial real estate. The main intention of the paper is to track any asymmetry between evaluation models at ZLB relative to more “normal” interest rate levels. First we apply a conventional net-present value (NPV) approach, where the weighted average cost of capital (WACC) and the capital asset pricing model (CAPM) are used for evaluation. Considering the invariance level of systemic risk we find WACC to be an alternative to CAPM for offensive and defensive investments when interest rates are “normal”. However, at the ZLB, WACC is an alternative for investments that carry the same risk as the market and beta-values are close to one. Second, we simulate our models using US data to see how the WACC shortcut performs across different interest rate levels, and especially at ZLB, in this economy. We see differences between the period preceding the financial crisis and the period after 2010, even though the Federal Funds rate is close to zero in both periods. We relate this to the difference in systemic risk between the two periods, and show how the result in the latter period is quite equal across evaluation models.

Interest Rates and Investment: Evidence from Commercial Real Estate

2019 ◽  
Vol 60 (4) ◽  
pp. 554-586 ◽  
Author(s):  
Liang Peng ◽  
Thomas G. Thibodeau
Keyword(s):  
Real Estate ◽  
Interest Rates ◽  
Commercial Real Estate

scholarly journals International Real Estate Review

2021 ◽  
Vol 24 (1) ◽  
pp. 113-138
Author(s):  
Shizhen Wang ◽  
◽  
David Hartzell ◽  
Keyword(s):  
Hong Kong ◽  
Real Estate ◽  
Interest Rates ◽  
Real Estate Market ◽  
Housing Affordability ◽  
Commercial Real Estate ◽  
Price Ratio ◽  
Distributed Lag ◽  
Risk Free Rate ◽  
Free Rate

We apply the dynamic Gordon growth model to the Hong Kong real estate market to analyze quarterly data on four kinds of real estate—housing, office, retail, and factory properties—from 1999 to 2020. We find that factories have the highest total returns among the four types of real estate, and also a larger Sharpe ratio. The total returns of these four kinds of real estate are highly correlated. The results of an autoregressive distributed lag model show that the gross domestic product growth rate is the key determinant of real estate returns, while changes in foreign direct investment also influence housing and retail returns. The expected value of the risk-free rate is the key factor that determines the rent-price ratio. The decline in the risk-free rate in Hong Kong is the main reason that the real estate price-rent ratio has increased from 20 to 40 in the last twenty years. Our research represents an early contribution that compares the performance of housing and commercial real estate at the city level, with both types of real estate having similar determinants. Finally, we find that the fall in risk-free interest rates worsens housing affordability in Hong Kong.

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