Boston Condos for Sale and Apartments for Rent
Boston real estate market to The Fed: Back Off
Clockwise from left: Miki Naftali, Josh Zegen and Matt Salem (Photo-illustration by Kevin Rebong/The Real Deal)
When the Fed’s no longer a friend. The recent rising interest rates force lenders and Boston condo brokers to the sidelines.
Two years ago, the Federal Reserve was purchasing billions in mortgage-backed securities, reducing the rate it charged banks for loans and relaxing regulations on banks. The policies led to an era of nearly free money for Boston condo buyers, and spurred a deal making bonanza for developers in the Boston Seaport District and Boston Midtown neighborhoods.
The rise of Boston real estate financing
Now, some see the Fed as the problem. It increased rates to 4 percent from near zero in less than a year. Everything from Boston high rise luxury condo construction loans to refinancing’s has become more expensive.
Boston real estate market still alive
Lending may have slowed, and distressed funds are ready to pounce, but there is no blood in the streets. There are no massive portfolio sales, no large-scale defaults, no runs on banks. At least not yet.
Boston condo market can’t bank on banks
For the past 40 years, interest rates have largely fallen. Back Bay condo borrowers could refinance with cheaper debt than their previous loan. And since the last recession, Boston condominium values for the most part have gone up, making lenders comfortable offering high-leverage loans. has changed. Rates are up and values, particularly for Class B and C office buildings, are uncertain.
The impact of the Boston Seaport District
Boston high rise luxury condo construction lending has become especially vulnerable to this new paradigm. Lenders are cautious about taking on leverage, while assumptions about cap rates — expected rates of return on properties — are more difficult because no one is sure how high interest rates will rise. Construction lending has the added risk that a project won’t get off the ground, leaving the lender to foreclose on the property or find another developer to finish it.
Boston condo high rise construction and the bottom line
But the question is, how bad will it get? Boston condo developers, owners and lenders are holding off, hoping the Fed will lower rates, praying the market will stabilize and inflation will be tamed.
Not everyone is so optimistic.
It could get really, really nasty.