It's been decades since negative leverage was a regular unwelcome guest in commercial real estate. Now it's a trend again, according to Moody's Analytics, between growing loan interest rates and cap rates.
For those in the industry who are too young to have knowingly felt the impact of negative leverage, the concept is simple. Whereas many will say the three ls of real estate are location, location, and location, it might be truer to say that they are more leverage, leverage, and leverage.
In CRE, typically you use borrowed money to buy properties and ultimately make money. Until recently, 70% or 80% loan to value ratios weren't unheard of, and that was fine. Interest rates were only barely above ground, prices past the global financial crisis were on the rise, and so were rents. The internal rate of return was far better on all that cheap leveraged money than on unleveraged.
Continue Reading for Free
Register and gain access to:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
*May exclude premium content
Already have an account?
Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
