By Orlando Rodriguez
Last year, when the Federal Reserve re-upped its “Quantitative Easing” policy for a possible perpetuity, analysts speculated on the effect that low interest rates would have on the housing market.
What was sometimes lost in the mix, in a country where suburban sprawl dominates the landscape, was the impact low interest rates would have on the urban anomalies — particularly the outlier known as Manhattan Island — where domestic real estate trends don’t apply.
Low rates, combined with anxious sellers trying to avoid higher taxes, set off a flurry of activity last year.
And for the first half of 2013, even without luxury-tax Chicken Littles pushing market activity, the game of multi-family hot potato has continued.
But a possible party pooper has arrived, in the form of higher interest rates.
“If rates continue to rise, it will affect sales,” said Aaron Jungreis, president of Rosewood Realty. “I think psychologically, once people see rates going above four percent, that’s going to have a little bit of an effect. But until it goes above four percent I am not worried at all. As long as there is a [number] three in front of it, I think there is going to be a real optimistic feel.”
Some analysts however feel that hitting, or coming close to a four percent threshold, is an eventual reality.
The multifamily five year loan rate for a small portfolio (under $3 million) is between 3.50 and 5.50 percent according to Steelhead Capital. On the consumer side 30-year fixed rates have been over four percent since the beginning of June. For major projects Standard and Poor’s speculated last month that the rise in interest rates could possibly lead to a $15 billion shortfall in CMBS bond issuance this year.
However, within all crisis’s lies opportunity. Rising interest rates have allowed smaller lenders, priced out to large banks over the past year or so, to become competitive.
“The bigger banks are jumping up their rates,” said Ira Zlotowitz founder and president of Eastern Union. “Banks that were priced out of the market are starting to be more competitive in the landscape. They now have an opportunity.”
“Many lenders were floating between less and than three percent and about 3.25 percent for five-year money. Then there was a second tier of banks that were smaller, they couldn’t compete on price and could never go below 3.5 percent. Banks that people didn’t consider up to now, are being considered,” he said.
In addition to additional funding options, the type of loans have widened slightly as well. Brokers and financiers have said that they have seen an increase in Mezzanine-type financing over the last few months. “I do see some volume happening with mezzanine deals,” said Jungreis. “Now five to ten percent of the deals I’m doing people are getting mezzanine.”
In addition, rising interest rates have brought sellers who had been sitting on the fence waiting for higher prices into the market, not wanting to take a chance that prices will drop. Buyers fearing even higher interest rates are increasing activity also, trying to get in while the getting is still good.
“We’ve noticed a 25 percent surge over the last two months,” said Zlotowitz. “It seems we are going to maintain this surge the next couple of months and then it will go down to a normal level.
“That is what we are seeing based on the volume of people we have.”