The Refinancing Gap Presents Opportunities
Prospect believes that significant equity and preferred equity investment opportunities will arise from the wave of debt refinancings occurring in 2023 and beyond. The commercial real estate market is facing $2.6 trillion in loan maturities through 2027, $1.0 trillion of which are collateralized by multifamily (MFR) assets, which make up our core investment strategy.
The spike in interest rates, which began in May 2022, has caused first mortgage lender advance rates to markedly drop. Consequently, refinancing these maturing loans will present an opportunity for MFR equity investors to (i) fill the funding gap to recapitalize existing partnerships or (ii) acquire MFR properties from sellers unable to refinance their maturing debt. Prospect has the liquidity to capitalize on these changing market dynamics.
Prospect estimates that since 2020, when debt funds and mortgage REITs dominated the MFR lending space, borrowing rates increased by approximately 325 basis points. Loan sizing today is down substantially given the rate environment and resultant DSCR constraints. Even with an estimated 15% increase in property NOI over the preceding 3 years, refinancing proceeds would decline by 35% based on a 15% estimated decline in property values, which creates the need for gap equity to make a refinancing possible.
Disclosures
Not an Offer or Solicitation: This is for informational purposes only and is not an offer or solicitation to purchase or sell any financial instrument or service to any person in any jurisdiction. This is not intended to be construed as investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy. Reliance upon this information is at the sole discretion of the listener and the listener should consider the investment objectives, risks, charges, and expenses of any investment carefully before making it. This is intended to be shared as National Property REIT Corp. (“NPRC” or "We") brand awareness and illustrate NPRC’s role in owning and operating real estate in the market segments discussed herein.
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A number of factors may prevent each of NPRC’s properties from generating sufficient net cash flow or may adversely affect their value, or both. These factors include, but are not limited to, national economic conditions, regional and local economic conditions (which may be adversely impacted by plant closings, business layoffs, industry slow-downs, weather conditions, natural disasters, and other factors), local real estate conditions (such as over-supply of or insufficient demand), changing demographics, perceptions by prospective tenants of the convenience, services, safety, and attractiveness of a property, the ability of property managers to provide capable management and adequate maintenance, the quality of a property’s construction and design, increases in costs of maintenance, insurance, and operations (including energy costs and real estate taxes), changes in applicable laws or regulations (including tax laws, zoning laws, or building codes), potential environmental and other legal liabilities, the level of financing used by NPRC in respect of its properties, increases in interest rate levels on such financings and the risk that NPRC will default on such financings, each of which increases the risk of loss, the availability and cost of refinancing, the ability to find suitable tenants for a property and to replace any departing tenants with new tenants, potential instability, default or bankruptcy of tenants in the properties owned by NPRC, potential limited number of prospective buyers interested in purchasing a property that NPRC wishes to sell, and the relative illiquidity of real estate investments in general, which may make it difficult to sell a property at an attractive price or within a reasonable time frame.
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