On Wednesday, the Federal Reserve announced a 50 basis point (.5%) reduction in the Federal Funds Rate. This marks what could be the beginning of a rate cutting environment. That is great news for real estate investors, as lower interest rates can improve cash flow by reducing debt service costs, which in turn increases cash-on-cash returns. Additionally, lower rates provide opportunities for locking in more favorable long-term financing, stabilizing interest expenses, and positioning deals for future refinancing under better terms. Let’s examine how these lower rates are impacting our portfolio.

It’s important to not that the federal funds rate only indirectly affects the commercial real estate world. Most of our work in commercial real estate is tied to treasury indexes. Banks typically base their interest rates on a 5-year index, which varies from bank to bank. Agency debt is also tied to U.S. Treasury rates—typically the 5, 7, or 10-year—plus a spread over those rates. Since investor sentiment drives treasury yields, we’ve seen significant rate fluctuations over the past six months. In fact, the 10-year treasury just hit a 52-week low this week. As the Fed signaled lowering rates, treasuries have dropped. This time last year the 10 year treasury was hovering around 4.5%. Today it is at 3.65%

Benefits of the Fed Rate Cut

As the Fed has signaled lower rates ahead we have seen indexes drop with has benefited our portfolio. We own two properties where the lower rates have been particularly advantageous. For these deals, the bank provided an opportunity for a mid-hold reset, allowing us to lock in a new, lower interest rate. With rates dropping 100 basis points, our financial projections for these properties have significantly improved, enhancing their performance and overall value.

Additionally, the rate cut has benefited the deal we currently have in progress, with our rate decreasing 70 basis points since we first went under contract. Securing this lower rate required ongoing monitoring and multiple requests to the bank to adjust the term sheet. This effort paid off, as it significantly increased our projected cash-on-cash return.

Alongside our strategic planning, these rate reductions enhance our current investment performance and create favorable conditions for future projects. By combining lower rates with our strategic approach, we can more effectively manage financing costs and potentially increase our returns.

Strategy and Stability

For new deals we're evaluating, we're targeting low-leverage, long-term debt. We closely monitor the 5- and 10-year Treasury rates, which haven’t shifted much this week due to their longer-term outlook. Since these rates haven't changed much, our strategy for new deals hasn’t needed to adjust.

None of the deals in our portfolio are nearing maturity, which eases the immediate pressure on interest rates. Deals struggle when they are relying on floating rates and bridge loans. We intentionally avoid those types of debt products, which means we pass on many deals, but it provides peace of mind for both us and our investors knowing we aren’t dependent on Fed policy to make or break our deals.

Our focus on low-leverage, long-term debt, combined with our careful monitoring of Treasury rates, ensures that we remain well-positioned in the current market environment. By avoiding reliance on floating rates and bridge loans, we not only protect our portfolio from short-term fluctuations but also provide stability and reassurance to our investors.

Looking Ahead

We’re committed to our strategy of securing long-term, fixed-rate debt with favorable terms and manageable prepayment penalties. This strategic approach not only provides us with stability in our financing costs but also positions us to take advantage of potential future rate improvements. The Federal Reserve's target rate of 2.5-3% offers a promising outlook, and if inflation remains under control, we anticipate the opportunity to refinance several of our deals in the 3- to 5-year time frame.

While we keep a close eye on interest rate trends and market conditions, our investment decisions are never based solely on the potential for refinancing. We aim to ensure that each deal can perform well under current market conditions, without relying on future rate changes to make or break our investments. This approach allows us to build a resilient portfolio that can withstand market fluctuations.

Thank you for reading and your interest in BLVD Ventures. We look forward to having you follow along. Feel free to reach out anytime with questions and connect with us further using the button below.