US INTEREST RATE CUT IS GOOD NEWS FOR ORBVEST INVESTORS!

In mid-September, the US Federal Reserve (Fed) announced the first cut in the Federal Funds rate since 2020. Although it reduced its target rate by only 0.5 basis points (bps), this is widely expected by economists to be the first of several cuts going into 2025, as the Fed will try to strike a delicate balance between cooling inflation and triggering a recession.

The rate cut is good news for investors in any type of real estate because it has several implications.

1. The first impact is the reduction in the cost of capital. Debt is used especially in commercial real estate to leverage the income of a building to increase the yield. A reduction in interest rates reduces the cost of owning the building which not only increases the free cash that can be distributed to investors but has a direct impact on the value of the building.
2. The second impact is the increased liquidity in financial markets. Lenders that have withdrawn from the market because they cannot support their Debt to asset ratios, are risk-averse, or don’t want to price new loans when there is uncertainty, are opening up lending again. Liquidity makes it easier to acquire buildings, which increases competition for good quality buildings, which increases prices.
3. The third impact involves timing. Although real estate entrepreneurs enter into multi-year financing agreements with lenders, those agreements terminate at the end of the fixed term, and cheap debt can become devastatingly more expensive. This presents an exciting opportunity to acquire buildings that, as a result of the prolonged high interest rate environment, are urgent sales as they now don’t have access to affordable Debt. This presents a huge opportunity for Investment companies like OrbVest with strong balance sheets to acquire good buildings at significant discounts, recapitalize them, and create instant value for the investors.An example of the situation explained above is the acquisition of Red Oak Atrium, a building that OrbVest has under contract in Texas. The building is 100% Medical and is acquired at a 9% capitalization rate (this means that if you paid cash you would earn 9% net income per annum), but is plagued by vacancies and has been neglected. The building will be acquired for cash by OrbVest and its investors, stabilized, and new tenants will be placed in the building. Once rates drop to an acceptable level, the asset will be leveraged at say 5% interest, while the net income (before debt) will be greater than 10% with new leases. This is why real estate entrepreneurs make money so quickly in a bullish market.