Navigating Interest Rates in Real Estate
The Impact of Interest Rates on Real Estate Investments
Interest rates are always an important consideration in our investment equation. Over the last few years, the rate increases have hugely impacted our industry. Servicing debt directly relates to anticipated returns. As we search the nation evaluating commercial real estate opportunities, we account for interest rates in our financial modeling.
Today, we are in a high interest rate environment, though we are expecting a rate cut from the Feds as they attempt to address inflationary pressures. How much that rate cut will be and over what period of time, is actively debated. No matter the amount, interest rates remain a key consideration in our investment strategy. Let’s explore why.
Increased Acquisition Opportunities
At Global Storage Partners, we unapologetically position ourselves as bottom feeders in the market. Our aim is to acquire real estate at rock-bottom prices for two key reasons. Firstly, by keeping acquisition costs low, we become formidable low-cost competitors in the self-storage market while maintaining high-quality projects. Lower project costs allow us to offer competitive rental rates and minimize risk by achieving higher occupancies. This strategy acts as a safeguard against downside risks while creating upside opportunities to increase project value through higher rents. With rising interest rates impacting the number of buyers in the market, we anticipate a decline in demand for redevelopment opportunities. This can lead to favorable property investment opportunities at more advantageous prices and terms, including distressed self-storage projects.V
Distressed Debt Opportunities
Before 2022, significant amounts of debt were incurred when market rates were favorable. This includes high-risk development debt and CMBS debt on more stabilized assets. With the Federal Reserve's upward actions that peaked in 2023, the question arises: Can existing self-storage properties, financed with CMBS debt, meet the new debt service coverage ratios when their loans mature? The same concern applies to development projects relying on high-cost bridge and construction financing. Given the high volume of CMBS loan maturities in 2023 and 2024, we have sought opportunities to acquire distressed debt. Global Storage Partners, through our Global Stor Real Estate Fund III, LLC, is well-positioned to pursue the purchase of notes in this evolving landscape.
Low Leverage Approach
Understanding the challenges and risks associated with high leverage in rising interest rate environments, Global Storage Partners adopts a prudent strategy with lower leverage financing. Our redevelopment projects typically involve loan-to-cost ratios ranging from 40% to 60%, or even lower loan-to-value ratios of 25% to 50%. This conservative approach not only mitigates risk but also allows us to secure lower-cost debt, reducing overall project expenses. While our cost of capital has risen, we have proactively factored it into our financial models. By capitalizing on compelling acquisition opportunities in redevelopment projects or distressed debt investments, our capital investment strategy aims to deliver robust risk-adjusted returns.
Massive Potential Ahead:
Despite the challenges posed by rising interest rates, Global Storage Partners has been acting on the potential in the self-storage sector. By leveraging our position as bottom feeders, exploring distressed debt opportunities, and employing a low-leverage approach, we are well-equipped to seize opportunities and drive success in CRE investments.
Stay tuned for further updates on our progress as we navigate this evolving landscape. As the market shifts, Global Storage Partners remains dedicated to providing excellent returns to our valued real estate investors while capitalizing on the ever-present investment opportunities in the commercial real estate sector.
