Refinancing Makes Sense, Even Now
Find out how the strength of industrial assets makes refinancing attractive, even as interest rates continue to rise.
Interest rates keep heading up. At the end of July, the Federal Reserve bumped them up 75 basis points — six weeks after an earlier 75-basis-point jump.
The Federal Open Market Committee has had five meetings this year, and they’ve issued four interest rate hikes. This isn’t over. And yet, refinancing your industrial real estate probably makes a lot of sense right now.
No, I’m not crazy; I promise.
Industrial Real Estate’s Strength Means Better Terms
Think about it: Industrial properties are, without a doubt, one of the the strongest asset classes. What’s more, there’s no sign of slowing demand or rent growth. Property values have taken off in the past few years, and there hasn’t been any sign of the corresponding deceleration in valuation some have seen even in other strong asset types like multifamily.
I could get into all the unique aspects of the industrial real estate sector that show the asset class has no signs of slowing. Thing is, I’ve already written about that extensively, both on this blog and elsewhere. And, if you’ve already got industrial assets in your investment portfolio, you already know that anyway.
Because of the industrial sector’s strength, financing terms are better for these assets than most others. Every lender should know that most industrial properties — especially distribution centers and warehouses — are powerful, long-term performers, and that these loans are far less risky than others.
Lower risk leads to better loan terms. Better loan terms lead to better bottom lines. Getting financing with longer amortization or with higher leverage can make a significant difference in how profitable your portfolio is.
But Interest Rates Are Rising. Why Refinance Now?
But why talk about refinancing as rates are climbing? Surely that’s a bad idea. Right?
Maybe not. It really boils down to the current financing you’ve got.
If your industrial property financing bears a variable interest rate, there’s no question that refinancing should be in the cards. Even if there’s a decent interest rate cap, it’s unlikely to be lower than a fixed-rate loan if you shop around (or let us do that for you).
Even if you’ve got a solid interest rate locked in, be sure you’ve got a plan for when that note matures. With interest climbing, we don’t know how much higher rates will go — but nearly all economists agree that they will go higher. If you’ve got a loan maturing next year, it could be far more painful to wait than to act.
Even if rates stop climbing now — and they won’t — it would likely be a few quarters, minimum, before the Fed revises rates back downward. And while a recession could hasten that timeline, the Fed has made clear that fighting inflation is its top priority, even if it means going into the next economic downturn.
Are There Downsides to Refinancing Now?
So, all in all, though interest rates are higher than a month ago, they aren’t as high as they’re going to get. And lenders are viewing industrial property refinancing loans as relatively low risk. So what’s the downside to taking a refi right now?
The downsides aren’t much different now than they were a year or two ago. If you have an industrial asset class or type that’s not in such high demand — say, a customized manufacturing facility that is not fully occupied — then lenders may not extend the best loan terms as a result. However, it really does depend on the individual bank, life insurance company, or CMBS lender.
Not sure which lender to talk to? Don’t worry — talk to us instead. We’ll source the best financing terms out there from our vast network of lenders. Just click the button below for a free quote.
Related Questions
What are the benefits of refinancing a commercial real estate loan?
Refinancing a commercial real estate loan can help investors achieve a better interest rate, a longer term, or a longer amortization, increasing their cash flow. In addition, borrowers may want to get cash-out refinances in order to free up capital to make renovations and improvements, or to invest in other properties. Refinancing may also be the logical choice for any borrower with an upcoming balloon payment from a partially amortizing loan. Other benefits of refinancing a commercial real estate loan include getting more manageable payments, leveraging an office asset with stable, strong performance, and taking advantage of longer loan terms and amortization schedules, which could translate into lower monthly debt service payments.
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What are the risks associated with refinancing a commercial real estate loan?
The risks associated with refinancing a commercial real estate loan include the possibility of a higher monthly payment at the end of the interest-only period when you are required to start paying both principal and interest. Additionally, if the property’s value decreases, you could find yourself underwater on your loan – owing more than the property is worth. Before taking out a loan, be sure to speak with a qualified commercial real estate broker to discuss all of the risks and benefits associated with this type of financing. Source and Source
What are the current market conditions for refinancing a commercial real estate loan?
The current market conditions for refinancing a commercial real estate loan are favorable for those with stabilized properties. According to Janover data, inquiries for refinancing saw a 99%-uptick in February over January, with this year’s refinance inquiries peaking in May, accounting for more than half a billion dollars or 16% of total requests. However, the sudden rush to refinance loans has blown the cost of swapping from floating to fixed rate out of proportion. Mirroring this trend, Janover data revealed that inquiries for refinances fell by 50.1% in June from May and remained in that range in the following months. Lenders have also tightened underwriting standards and are focused on near-term maturities and whether their borrowers will be able to refinance those loans under the current economic conditions. This will depend greatly on rent and cash flow, which means that property types in high demand, including multifamily, will most likely have a less stressful time ahead.
If time is a factor, consider reevaluating your desired loan terms. Looking to refinance debt at a lower loan-to-value ratio is a great way to improve your loan terms. It may require you to invest more into the property, but the longer-term impacts of lower-cost debt servicing are likely worth considering.
For more information, please visit Janover Data Reveals Steady Stream of CRE Loan Inquiries and Commercial Mortgage Rates.
What are the best strategies for refinancing a commercial real estate loan?
The best strategies for refinancing a commercial real estate loan depend on your specific needs and financial situation. Refinancing may be the logical choice for any borrower with an upcoming balloon payment from a partially amortizing loan. This is the case for CMBS loans, hard money loans, construction loans, and bridge financing, but it can also be common for many types of bank loans and most Fannie Mae or Freddie Mac multifamily loan products. It is important to research all of the available options to find the best financing option for your investment strategy. Our team is standing by to assist you in finding the absolute best loan for your investment needs. Fill in the form on our How to Get a Commercial Real Estate Loan page, and we’ll get back to you with a free quote.
What are the most important factors to consider when refinancing a commercial real estate loan?
When refinancing a commercial real estate loan, the most important factors to consider are the interest rate, fees, repayment terms, and the purpose of the loan. It is important to compare different loan products to find the best one for your needs. Negotiating with lenders is also encouraged as it could result in more favorable terms.
Interest rate is an important factor to consider when refinancing a commercial real estate loan. A lower interest rate can result in lower monthly payments and overall cost of the loan. It is important to compare different loan products to find the best one for your needs.
Fees are also an important factor to consider when refinancing a commercial real estate loan. Different lenders may charge different fees, so it is important to compare different loan products to find the one with the lowest fees.
Repayment terms are also an important factor to consider when refinancing a commercial real estate loan. Different lenders may offer different repayment terms, so it is important to compare different loan products to find the one with the most favorable terms.
The purpose of the loan is also an important factor to consider when refinancing a commercial real estate loan. Lenders will want to see evidence that you have a solid plan in place for how you intend to use the property and generate income from it. Lenders will also want to see proof that you have the financial resources in place to make a down payment and cover closing costs.
What are the most common mistakes to avoid when refinancing a commercial real estate loan?
When refinancing a commercial real estate loan, it's important to avoid common mistakes such as not shopping around for the best rate, not understanding the terms of the loan, and not having a clear plan for how the loan will be used. It's also important to make sure you have all the necessary documents and information ready before applying for the loan. Additionally, it's important to understand the fees associated with the loan and to negotiate with the lender to get the best possible deal.
For more information on refinancing a commercial real estate loan, check out 5 Tips for Refinancing a Commercial Real Estate Loan.