Navigating Interest Rate Uncertainty: Strategies for Institutional Real Estate Joint Ventures (JVs)

Impact on Cap Rates and Financing Costs

Cap rates and financing costs are central to institutional JV investments, particularly for industrial shallow bay assets.

Cap Rates

Cap rates, the ratio of net operating income to property value, generally rise with interest rates as investors demand higher yields. Fed rate hikes in 2022–2023 pushed industrial cap rates to 5.0%–5.5% nationally in 2024, per Real Capital Analytics. Elevated rates in 2025 could further increase cap rates, pressuring valuations, while potential rate cuts may stabilize or reduce them. Tariff-related cost increases (e.g., construction materials) could challenge cash flow as well.
In the Southeast, Excelsior Capital’s core market, shallow bay assets benefit from strong fundamentals. High demand from logistics and distribution tenants, coupled with constrained supply in key submarkets, supports cap rate stability, making these assets a compelling choice for institutional capital.

Financing Costs

For new acquisitions, financing costs are critical. Elevated interest rates raise debt costs, impacting returns. The Fed’s 2024 rate cuts lowered the 10-year Treasury yield, but rates for new loans may range from 6.0%–6.5% in 2025, challenging deal economics. Potential rate cuts could ease costs, though tariff-driven inflation adds uncertainty. Excelsior Capital’s disciplined approach to securing life company or shorter-term bridge debt ensures cost-effective financing for shallow bay acquisitions.

Structuring JV Deals for Industrial Shallow Bay Assets

Drawing on our JV experience, Excelsior Capital recommends the following strategies to structure institutional partnerships for industrial investments, emphasizing risk mitigation and alignment of interests.

1. Risk-Sharing Mechanisms

• Contingency Reserves: Establish reserves to address tariff-driven cost increases, such as tenant improvements, ensuring financial flexibility.
• Flexible Exits: Incorporate multiple exit options (e.g., sale, recapitalization, hold) to adapt to market shifts, such as cap rate changes or tenant dynamics.

2. Asset-Specific Due Diligence

• Tenant Diversification: Prioritize properties with diverse rent rolls to reduce concentration and lease rollover risk.
  
• Strategic Locations: Target Southeast submarkets with high demand and limited future supply, such as infill urban locations, to maximize long-term occupancy and rent growth.
• Value-Add Potential: Select assets with opportunities for rent increases through lease-up or mark-to-market, providing a buffer against cap rate expansion.

3. Scenario Planning

• Stress Testing: Model returns across interest rate scenarios (e.g., steady rates, 50 bps cut, 25 bps hike) to ensure resilience, incorporating tariff-related cost impacts.
• Hedging Strategies: Use interest rate swaps or forward-starting loans to secure favorable rates for acquisitions, minimizing volatility.
• Inflation-Protective Leases: Negotiate healthy rent escalations to safeguard against inflation.

Risk Management for Institutional JVs

Our institutional JV expertise underscores the importance of robust risk management:

• Liquidity Reserves: Maintain ample liquidity to cover debt service or capital expenditures, critical for industrial assets with shorter lease terms.
• Regulatory Compliance: Navigate evolving CRE banking regulations, such as concentration risk rules, with expert legal and financial guidance.
• Proactive Monitoring: Track macroeconomic trends (e.g., 10-year Treasury yields, industrial vacancy rates) and policy shifts (e.g., tariffs) to adjust strategies proactively.

The May 6-7 Fed Meeting

The May 6-7, 2025, highlighted FOMC’s outlook on a wait and see approach. Chair Powell stressed the importance of data, and not making any decisions ahead of future data (as a leading step).
This is in context of the interim tariff deals announced over the past few weeks, as well as the CME Fed Watch’s expectations of limited rate cuts through the remainder of 2025. The incoming data over the next quarter is expected to be instructional with respect to the rate curve over the next eighteen months.

Conclusion

Excelsior Capital’s experience with institutional JVs equips us to navigate 2025’s interest rate uncertainty. By leveraging our expertise, disciplined financing, and strategic deal structuring, we empower institutional partners to achieve resilient returns in industrial opportunities. Post the May 6-7 FOMC meeting, agility and insight will unlock opportunities in an evolving market.

For more thought leadership on institutional real estate, visit www.excelsiorgp.com.