As Interest Rates Rise, Brooklyn Real Estate Financing Favors Climbing The Capital Stack
As the U.S. economy continues to strengthen, the Federal Reserve is positioned to continue raising interest rates for at least another year. As rates seem to be rising faster than rents, the real question becomes how do landlords refinance out of their existing mortgages? While it has indisputably become more complicated to finance commercial real estate projects, a borrower can nimbly refinance a maturing loan by tapping into structures higher up on the capital stack, such as mezzanine financing or preferred equity.
A red-hot labor market and muted inflation has the Fed confident that the economy can withstand the impact of higher rates, with gross domestic product – the broadest measure of goods and services produced in the U.S. – growing at a 3.5% annual rate in the third quarter. While that’s below the second quarter’s 4.2%, which was the strongest since the third quarter of 2014, it was sharply above the first quarter’s 2.2%. A stronger economy has led to a surge in demand for housing in rapidly growing markets, such as Brooklyn, where new jobs are being created amid a growing population.
The Fed’s policy-making arm has raised short-term interest rates three times this year, with one more penciled in for its December meeting and at least another three forecasted for 2019. This should put more upward pressure on rates and eventually lead to even higher borrowing costs on consumer and business loans.