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Commercial Property Crisis: High Rates Push Owners to Tough Decisions

by Team Lumida
May 17, 2024
in CRE, News, Real Estate, Themes
Reading Time: 3 mins read
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Key Takeaways

  1. Higher-for-longer rates disrupt commercial real estate refinancing plans.
  2. Rising costs of interest-rate caps increase financial pressure on property owners.
  3. Owners may need to sell or walk away from troubled properties.

What Happened?

Higher-for-longer interest rates are shaking up the commercial real estate market. Many property owners hoped for rate cuts in 2024, believing they could wait out the high rates and refinance their loans more easily. However, the Federal Reserve’s decision to keep rates steady, along with persistent inflation and robust economic data, dashed these hopes.

The forward curve now suggests the secured overnight financing rate (SOFR) will be 4.825% at the start of 2025, indicating only two small cuts this year instead of the six expected in January.

Why It Matters?

The extended period of high rates increases the cost of hedging interest-rate exposure for property owners. Borrowers with floating-rate debt must purchase interest-rate caps to reassure lenders they can meet repayments even if rates rise. For instance, extending a one-year interest-rate cap on a $100 million mortgage at a 3% strike rate now costs $2.1 million, up from $1.3 million in January.

This situation forces commercial real estate owners to reassess their options, potentially leading to a surge in property sales or loan defaults, which could impact property values and market stability.

What’s Next?

As high rates persist, property owners face tough choices. Some may need to inject more capital into their properties to secure loan extensions, while others might decide to sell their buildings early, despite the uncertainty about prices. The extend-and-pretend strategy that worked post-2008 financial crisis is less viable now, as ultralow interest rates are unlikely to return.

Keep an eye on commercial real estate transactions and potential market adjustments as owners navigate these financial pressures. This evolving landscape could present both risks and opportunities for investors in the real estate market.

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© 2025 Lumida Wealth Management LLC is an SEC registered investment adviser. Privacy Policy. Cookies Policy.
Disclaimer Important Information This site is for informational purposes only. Information presented on this site does not constitute as investment advice.

Lumida Wealth Management LLC (‘Lumida”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

Lumida's website (referred to herein as the "Website") is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of the Website on the Internet should not be construed by any client and/or prospective client Lumida’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.

Any subsequent, direct communication by Lumida with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

‍Lead Capture Forms: By submitting your contact information in the forms on this site, you are not obligated to invest in Lumida's product or services.
‍Address: Lumida Wealth Management, 25 W 39th Street Suite 700, New York, NY 10018