10 year Treasury at 4.18% right now. That's 20 bps higher than last week, 30 bps higher than last month, 65 bps higher than 6 months ago. I was on a call yesterday with some supposedly plugged in secondary market types who said they think rates will not drop any the rest of this year.

The credit box is tightening like I have never seen. Regulators are squeezing like never before. If you are not stress testing CRE projects from both interest rate shocks and NOI value propositions, you are in for a rude awakening. The numbers don't work on legacy projects, and anyone that has tenants locked in on long-term leases needs to quickly reevaluate the terms. Are rates going to come down? Maybe -- but not for another 12-18 months in my opinion. The people really paying attention are disposing of assets and getting out.

I'm hearing even longer. It's definitely going to be an interesting ride over the next couple years. I'm in a couple deals where mgmt has executed a full turn around, 95%+ occupied, rents higher than plan...but have variable rate debt and are CF negative. Fun times.

Only going to get worse. The cap strikes on those variable deals are ridiculously expensive and some lenders aren't permitting anything less than 2-5 year terms depending upon the deal.

There's been several notable MF operators of late who've had to issue capital raises because their portfolio exposure to variable rate is eating into the cash flows with the caps and the increased monthly mortgage payments.

Well it's funnier when the gif moves.

bkag9824 said:

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Have MF deals historically been built on shorter variable rate mortgages? Or was that a relatively recent dynamic spurred on by cheap debt with the goal of building/rehabbing, stabilizing, then exiting for significant gains?

As a lay person with no MF experience, the little info I've read makes it sound like a very risky approach to what should be a med-longer term mortgage/CF play.

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Every Johnny come lately with a little bit of money was able to miraculously be a multifamily expert overnight with historically cheap debt. NOI didn't even have to grow. Cap rate compression did all the work for them. And they got increasingly more bold between 2018 and 2021 with variable bridge loans and throwing money at anything they could instead of assessing the quality of the real estate. When you approach a time in history where you have to go hard on day one with hundreds of thousands of dollars merely to be able to compete for a 70's built deal in a secondary market, it's time to take a step back and watch the fireworks.

And now there's a massive gap between what buyers are willing to strike on and the expectation that sellers have. And without rates dropping, it's not going to change.

Adding on to what Heineken said - part of what they were doing was a 3-5 year hold period, with the hopes of cash out refinancing at some point by year 3 to return cash back to investors and get most of the hard equity out. Fixed rate debt has higher prepayment penalties that eat into the returns, so they used floating with the 1% of the UPB.

But now those Johnny's have gotten themselves into a tight pickle on the increase monthly payment, increased escrows and higher insurance premiums. But the insurance is hurting everyone.

So true. Some of syndicators I talked to over the last 5 years it was quite obvious did not understand what in the hell they were doing much less the unsophisticated "investors" they were getting funding from. The lowest rate was ALL that mattered, not term. They simply had no fear of interest rate risk at all out of naiveite. and here we are.

Beginning 1-20-2021 shouldn't it have been expected that a disaster was on the horizon?