Monday, June 05, 2006

Experts Question Impact of Rising Interest Rates

TAMPA, FL-Industry experts are questioning whether rising interest rates will result in a slowdown of commercial real estate activity later in 2006 or 2007.

At a recent 2006 Brevard County Economic and Real Estate Outlook conference in Melbourne, Florida Institute of Technology associate professor Michael Slotkin told participants that the Brevard County economy is strong but could be hampered by further interest rates.
In fact, many real estate professionals have already been witnessing a slowdown in activity due to rising interest rates. Jay Crotty, senior associate with Marcus & Millichap’s Central Florida multifamily team, says he has already seen a slowdown in condominium conversions due to rising interest rates. Crotty, who works with brokers Bob Goldfinger and Tim Johnson, works out of the company’s Tampa office. “With rising interest rates, the cost of getting a loan is increasing,” Crotty says.

To get a loan to complete a condo conversion project, lenders are requiring the loan to be underwritten over a longer time period than in past years. This increases the carrying costs of the loan and decreases the profitability of potential projects, he explains.

Crotty adds, however, that the main reason the condo conversion craze has slowed is that speculative, investment buyers are not making as many purchases as in the past. “People who are moving to Florida are still buying. But the speculative, investment buyer--such as a doctor or lawyer in Chicago--is acting more cautiously and carefully,” he says. “The owner/user market is still strong. Baby Boomers are still moving to Florida. But the investor buyers are more cautious. A year ago, they may have bought a property sight unseen. Now they’re acting much more cautiously.”
Jeffrey Sweeney, president of Grubb & Ellis Commercial Florida, calls interest rates the “Achilles heel of the Brevard economy and much of the Florida economy.” He estimates that 100 basis points may be the “tipping point” for most developers in Florida. “When the cost of money diminishes the return anticipated from a project below the double-digit threshold, developers usually find that unacceptable,” Sweeney says. “They will shelve the project until more affordable rates return.”


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