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5 Secrets To Mitigate Refinancing Challenges For Commercial Real Estate

September 18, 2023

Written by Gary Brozowski | SVP / Director of Commercial Real Estate Lending

During the past 18 months, interest rates have increased dramatically for commercial real estate loans rising from a low of 3.25% in late 2020 to over 7% today. Financing for commercial real estate loans is based primarily on a spread over the corresponding US Treasury rate for a fixed rate loan, or based on a spread over the Prime rate for floating rate construction loans. This leads to challenges in refinancing existing loans that are maturing as well as construction loans which are being refinanced - both of which were likely originally underwritten when rates were substantially lower.

Rising interest rates have a significant impact on commercial real estate lending, affecting the cost of borrowing and the returns on investment. Here are some ways interest rates have affected commercial real estate financing:

  • Higher cost of capital: Higher interest rates increase the cost of borrowing, making it more expensive for borrowers to refinance their commercial real estate projects.
  • Lower returns on investment: Higher interest rates reduce the returns on investment, making commercial real estate projects less attractive to owners and investors.
  • Reduced demand: Higher interest rates can lead to reduced demand for commercial real estate, as businesses and investors are less likely to take on new projects.
  • Increased risk: Higher interest rates increase the risk of default for borrowers, as they may struggle to make loan payments when borrowing costs are high.
  • Slower growth: Higher interest rates can lead to slower growth in the commercial real estate market, as businesses and investors are less likely to take on new projects when borrowing costs are substantially higher.

Refinancing commercial real estate in this environment can be challenging. S&P Global suggests that “the prospect of interest rates remaining higher for longer combined with [potentially] declining property valuations will keep refinancing conditions strained for borrowers in the commercial real estate (CRE) sector for the near term.”

Despite these challenges posed by the rise in interest rates, there are strategies that borrowers can use to mitigate their impact. These include building strong relationships with lenders, lowering the overall debt on the property, offering additional collateral, seeking alternative financing options, and being flexible with loan terms and repayment schedules.

  • Building strong relationships with lenders: Building strong relationships with lenders can help borrowers secure financing even in challenging market conditions. Also keeping an open dialogue with your lender is crucial as issues arise.
  • Lowering the debt: Borrowers can reduce their financing costs by repaying a portion of the debt to lower debt service, allowing the lender to move forward with a potential refinance.
  • Offering collateral: Offering additional collateral, such as other properties or personal assets, can help borrowers refinance.
  • Seeking alternative financing options: Seeking alternative financing options, such as a joint venture partner or private equity infusion, can help borrowers refinance.
  • Being flexible: Being flexible with loan terms, debt paydowns and other loan terms can help borrowers secure a refinance even if they don't meet every one of the lender's loan criteria.

Commercial real estate lending faces several challenges that make it more difficult for both banks and borrowers to refinance existing loans. However, these challenges can be potentially overcome by everyone managing their expectations as well as being flexible in structuring the loan to meet the criteria of a performing commercial real estate loan.

About Gary:

Gary Brozowski is focused on leading Kearny Bank’s commercial real estate lending activities throughout our home state of New Jersey, as well as in New York and Pennsylvania. In essence, this entails management and oversight of transactions on multifamily, mixed use, and industrial projects across our market area. Gary has held various senior management positions related to real estate finance during his career, and immediately prior to joining Kearny Bank was Vice President of Northeast Originations for Alliant Capital. He holds a masters in Real Estate Investment and Development from New York University, and a bachelor’s from Rowan University. A member both of the National Association of Home Builders and the Mortgage Bankers Association, he currently resides in Wayne, NJ.

Contact Gary to learn more about Commercial Real Estate Lending at Kearny Bank!

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