Three Portfolio Keys to Weathering the Higher-for-Longer Environment

This piece is adapted from an article originally published by GlobeSt. Read the full coverage here. 

Just a year ago, the commercial real estate market (CRE) was pricing in lower interest rates. But oil shocks and other macroeconomic pressures have kept inflation elevated, causing the Federal Reserve to hold steady and even contemplate raising rates again. That has created a more challenging environment for CRE asset managers. With higher-for-longer rates interest rates, asset managers are rethinking how they monitor and manage portfolio risk.  
 
“Asset managers have to figure out ways to be more active and proactive,” says Ji Won Sin, Managing Director, Head of CRE Client Services at SitusAMC. She says asset managers should focus on three portfolio management priorities. 
 
1. Understand the New Normal 

In a low-rate environment, borrowers typically had more room to absorb setbacks. Today's higher rates leave far less cushion, making active portfolio management increasingly important. 

Sin recommends a three-part approach: engage with borrowers early to understand potential challenges, tighten surveillance and reporting to identify problems sooner and establish a clear action plan for addressing issues as they arise. 

Even fundamentally sound properties aren't immune. Refinancing needs, higher debt service and elevated cap rates can all put pressure on an asset. 

“All of those are substantially higher now and can stress an asset,” Sin says. 

2. Build Real Visibility 

Covenant and trigger monitoring, once treated largely as a compliance exercise when growth was strong and rates were low, has “transformed into one of the most useful and critical management tools,” Sin says. 

Identifying a triggered covenant is only the first step. Acting on it, whether by sweeping excess cash, requiring a reserve or modifying loan terms, can make a significant difference in managing risk. 

Technology can help by bringing fragmented borrower and market data into a single view and giving asset managers a faster read on where to focus. But tools are only part of the solution. 

“It's not going to make the risk management and analysis issues go away,” Sin says. Interpreting the data and determining the appropriate response still requires an experienced asset manager. 

3. Act Quickly 

Once stress appears, speed matters. The longer an asset manager waits, the fewer options may remain and the more liquidity can erode. 

At the same time, the volume and complexity of information required to manage portfolios is straining internal teams. Some firms are responding with a hybrid approach, pairing internal teams that set credit strategy and make portfolio-level risk decisions with outsourced asset management for specialized expertise, surge capacity and scalability. 

Sin expects the current environment to favor lenders that combine speed with discipline. Firms that identify risks early, act quickly and preserve their options will be better positioned to manage portfolios as higher rates persist. 
 
To explore how SitusAMC is helping power opportunity across the CRE lifecycle, visit our website.