Inflation has taken its toll
He summed up the impact that inflation had on business last 12 months, forcing the Fed to tinker with rates of interest to suppress it. “As the 12 months progressed, we saw the start of some pretty serious rate hikes,” he said. “Today now we have 4.5% Fed funds and we began at 25 basis points,” he said in an interview earlier this week. “Since this began, we have seen a rise of 325 basis points.”
This left a mark: “So these are the rate of interest spikes which have affected business real estate – whether it’s how much debt costs today to create leverage and deals, or whether those rate hikes affected existing assets, existing portfolios, that are linked to floating rate debt’.
He suggested the present situation was a spoiler: “It’s been really hard for people to not earn a living in real estate for the last 10, 12 years,” he said. money, very accommodating Fed, very solid environment, so lots of people made lots of money. A variety of people who find themselves newer to the industry have not really undergone cycles like us.” “We have been through many cycles and we understand that. But it should definitely be more of a challenge to maneuver to 2023.”
Adjust your tactics to flow
McKnight detailed how RREAF Holdings has navigated the changing economic landscape: “As we wrapped up 22 and moved into 23, looking back and making some assessments, probably within the last 18 months leading as much as the top of twenty-two we could have benefited from very strong prices available in the market to exit some trades,” he said. “Oh my gosh, I believe we closed $700 million or more in assets within the last 18 months – a really profitable realization for us and our investors. You have lots of capital chasing profit and trades, so there may be some imbalance – perhaps where the assets ought to be valued against what they’re valued for. We definitely took advantage of it. However, in those self same 18 months, we were still net asset buyers because we had the capability, we had the capital available to pursue when opportunities presented themselves.”
Learning from the past
He advised those that are latest to the CRE space to learn in regards to the past. “I’d say read lots, study lots and take a look at your best to know what history is telling us,” McKnight said. “Everything that goes up eventually comes down. We are currently in a transitional environment where there will probably be many opportunities. There will still be disconnections, and sometimes these disconnections will shift in favor of the trader. We have some disconnects in the meanwhile that aren’t necessarily in favor of investors given where leverage costs and where cap rates are currently on certain asset types,” he said.