Impact of rising Interest Rates on Cap Rates
Last week during our local SIOR meeting, I spoke about the impact of rising Interest Rates on Cap Rates. As interest rates rise, borrowers (buyers in need of debt) chasing lower cap rate properties may experience "negative leverage." If the term is new to you, negative leverage occurs when borrowing costs are greater than the overall return produced by the property's cash flow.
The article (which may be read in its entirety HERE) touches upon the scenario:
“If debt costs rise substantially, it is possible certain investors may experience ‘negative leverage,’ wherein mortgage costs exceed capitalization rates,” the report predicts. “Investors using limited or no leverage are expected to have a considerable advantage bidding on and winning deals during the remainder of 2022, particularly in negative leverage situations and when interest rate volatility impacts financing.”
Cash remains king, but for how long? The thing about Cash compared to a 1031 exchange... there is not an accelerated timeframe for deployment. Cash can dry up in a recessionary period or sit idle waiting for better opportunities. I always struggle with the huge amount others quote for cash on the sidelines. It is like ice cream in the freezer when you have kids. I went to bed and it was there. By morning, it was gone and I did not get my Cookies and Cream!