The Fed’s September interest rate cut of 50 basis points (“bps”) and subsequent 25 bps cut in November has calmed the headwinds created by high interest rates that slowed real estate transaction volumes over the past two years. Investors who had been standing on the sidelines are beginning to reengage with markets, as they seek to unlock increased returns on commercial real estate investments enabled by the drop in the cost of capital. 

While a 75 bps drop in the overnight Fed Funds rate may not seem like much, the corresponding decrease in commercial real estate lending rates has had a material impact on real estate investment. For example, an investor could have purchased a multifamily property in Houston, Texas in Q3 2023 for $15 million using a floating-rate loan with a financing rate of ~7.2% and a loan-to-value (“LTV”) ratio of 60%. The property’s cap rate was 6.2% at time of purchase last year. After accounting for interest expense, the investment would have generated an annualized 4.8% cash on cash return. 

A year later, in Q3 2024, the investor’s floating financing rate dropped to ~6.3% on the same loan balance. Net operating income also increased during the period by 3.4% due to rental growth in the Houston market over the year, and the investor’s equity in the property grew by 6% due to price appreciation. Importantly, the most material impact on the investment is due to the lower financing cost, which helped increase the investor’s annual cash on cash return to 5.7%.

Read more about the potentially favorable outcomes from shifting market tides and examine historical patterns of extended performance in the PDF.

DISCLOSURES 

All real estate investments, ranging from equity investments to debt investments, are subject to some degree of risk. ©2024 Oaktree Capital Management, L.P.; ©2024 Brookfield Oaktree Wealth Solutions LLC; and ©2024 Brookfield Public Securities Group LLC. Brookfield Oaktree Wealth Solutions LLC and Brookfield Public Securities Group LLC (“PSG”) are subsidiaries of Brookfield Corporation (“Brookfield”). 

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