Commercial Real Estate Financing Insight Past News Letter

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March 2024 Financing Market Insight

During the March meeting, the Federal Reserve maintained interest rates at their current level of 5.25% to 5.5%; the meeting was not solely focused on this decision but also on the Fed's projections for the future of rate cuts. Despite ongoing speculation and previous projections, policymakers at the Fed have maintained their expectation of rate cuts this year. A growing number of news outlits now envision fewer rate cuts this year. projected in December, suggesting a cautious approach to easing monetary policy.  

News headlines are beginning to predict reality That rate cuts may not come as soon as initially predicted. I looked at the CME rate cut tool based on September Predictions There is only a 3.2% chance that the target rate will still be at 5.25 to 5 50. There’s a 44.8% chance that the rate will be 50 basis points lower and a 27.5% chance that the rate will be 75 basis points lower.

The decision to keep interest rates unchanged Demonstrates the central bank’s commitment to a target inflation rate of 2%. This cautious stance continues to be driven by economic indicators and a reassessment of inflation expectations. Fed officials have adjusted inflation forecasts upwards and acknowledge an increased risk of inflation. This view reflects a commitment to not alter monetary policy based on short-term data fluctuations.


Chairman Jerome Powell's commentary provided a clear insight into the Federal Reserve's strategic approach to tackling inflation while fostering economic stability. Powell emphasized, “Strong hiring in and of itself would not be a reason to hold off on rate cuts,.” This statement is particularly significant in the context of recent inflationary trends, as indicators such as the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) have reported increases for January and February. Powell's remarks indicate adjustments will be made with a comprehensive view of economic health rather than singular data points.


Debt providers are maintaining a conservative approach, preferring to lend on stabilized properties with well-capitalized borrowers. Lenders have the capital to deploy adjusting rates to attract more borrowers while continuing to closely monitor internal deposit limits. Competitive rates are particularly available for owner-user clients due to their larger deposit potential. While funds are accessible for value-add properties, private financing, and Debt funds are often the primary source for bridge and construction financing.

February 2024 Financing Market Insight

It seems that most Local as well as national news more than not place an optimistic stance on the economy. Unfortunately, the reality is less palatable Than optimism. On February 4th, 2024, CNN put out An article titled Fed chair Powel: The ‘” Time is coming” For rate cuts. If you read further, You will see “but ask Americans for a bit more patience in the central bank’s fight against inflation” Similar optimistic headlines could be seen from the Wall Street Journal. Fox Business put out a similar title:” Fed’s Powell says the time is coming to cut interest rates.” An hour after that, on February 5th, The New York Post reported Federal Reserve Chair Jerome Powers Sternly pushing back against eminent rate cuts the title of the article was “Dow plunges more than 350 points after Fed chairs rate comments spooks market.”


The CME group Upgraded Its Charts, changing its prediction for a May cut from 100% to 63%. It may even go down further. The Fed will lower rates at some point. With an increase in job cuts as well as A softer real estate market, I do expect some level of recession to take place. As further proof of market uncertainty, Brookfield, one of the largest owners of commercial real estate, Is raising cash to take advantage of a softer market. As a reminder, the change in the rate affects short-term interest rates immediately and does have less of an impact on longer interest rates, Such as the 10-year Treasury rate.


Where are rates going? We just must look at my favorite benchmark, the 10-year Treasury, On February 1st, it stood at 3.87%, but by February 5th, it had increased to 4.03%. Monitoring these treasury yields is crucial. It's noteworthy that there has been a significant influx into Treasuries since last October, coinciding with the rates reaching 5%. The response to the fluctuating market varies among lenders; some are conserving cash, while others continue their operations as usual. Securing the most favorable interest rate depends on the willingness of lenders to allocate capital at any given time.


How does this affect you? A slowing economy will lead to lower interest rates. Many debt providers are lowering rates to keep in step with the market. Plan your debt strategy with the expectation that interest rates will not get to historic lows again in our lifetime unless there's a major economic catastrophe. Lenders currently are providing rates between 5.8% to 7.5%, so finding the best lender for your project will have significant benefits to your bottom line. Borrowers with higher loan-to-value requirements should continue to expect their LTV to be constrained by DSCR due to continued higher interest rates.  Expect lenders to conduct more thorough due diligence and scrutinize borrowers' qualifications.

January 2024 Financial Market Insight

Happy New Year! I'm thrilled to share some optimistic commercial real estate financial news as we step into a promising 2024. The recent drop in the 10-year Treasury Rate, coupled with some lenders beginning to reduce spreads, signifies an excellent opportunity for better rates. Notably, the Federal Reserve is considering deviating from its "higher for longer" stance, indicating potential rate cuts ahead. This shift is partly due to the availability of more precise data previously not available. Ideally, this extra data will help the FED lead us to an economic “soft landing.”

There's an evident statistical decrease in delinquency. In their December data report Credit IQ noted a drop in CMBS delinquency rates by 36 basis points to 7.17%. However, sectors such as office, multifamily, hotel, and retail have seen upticks in delinquency since November. This information, however, is misleading because the stats were skewed by the removal of two large industrial deals that previously were in distress.

 

On the treasury front, the 10-year rate dipped to 3.79% on December 27th but as of January 8th the rate has climbed to 4.01%. Not to worry, historically, interest rates tend to increase at the beginning of the year.

 

When will rates come down?  The CME Group, a data analytics company, predicts what could be next for the Federal Reserve and when rate cuts may take place. The current federal funds target rate today is 5.25% to 5.5%. CME forecasts that, by the end of January, there is a 93.3% chance that there will not be a rate cut. During the March meeting, there's a 69% chance of a rate cut of 25 basis points. May is where it gets interesting; according to analytical models, there is a 100% chance of a reduction. There is a 24% chance that the target rate will be between 5% and 5.25%, a 58% chance that the target rate will be between 4.75 and 5% and a 16.5% chance the rate will settle between 4.5% and 4.75%. Keep in mind that the immediate impact of lower interest rates will initially affect short-term rates, such as prime.

 

 While these developments are encouraging, it is crucial to proceed with caution. Historically, larger rate cuts have often led to recessions, barring two exceptions where rates subsequently increased after 12 to 18 months. For commercial real estate owners, lower interest rates might be on the horizon if the economy slows and funds are pushed from speculative investments to more conservative vehicles such as treasury bonds. This flow of funds change should push down treasury rates.

 

How does this affect you? A slowing economy will lead to lower interest rates. Many debt providers are lowering rates to keep in step with the market. Plan your debt strategy with the expectation that interest rates will not get to historic lows again in our lifetime unless there's a major economic catastrophe. Lenders currently are providing rates between 5.8% to 7.5%, so finding the best lender for your project will have significant benefits to your bottom line. Borrowers with higher loan-to-value requirements should continue to expect their LTV  to be constrained by DSCR due continued higher interest rates.  Expect lenders to conduct more thorough due diligence and scrutinize borrowers' qualifications. 

 

Call me for more proceeds, a lower rate, and the best commercial and multifamily real estate debt available. 

I wish you a prosperous 2024.

December 2023 Financial Market Insight

Happy Holidays! This month, I will touch on the potential for a reduction of the federal funds target rate next year. I will also share where inflation sits and the current stance of the Federal Reserve chairman. I will continue by discussing how rates have changed over the last month and a half and will finish by speaking about lender underwriting, how it has evolved, and how changes may affect you.


I've read many optimistic articles describing a possible reduction in the federal funds rate next year. The federal fund rate is adjusted based on current market trends, not on what will keep the economy moving forward aggressively. With retail sales continuing to stay solid and the stock market continuing to show gains, it is unlikely that a cut will be needed if there is a “soft landing”. If a soft landing is what the Fed is aiming for, there would be no need to reduce interest rates. The statement soft landing indicates no recession.


There is good news. At the beginning of the month, the Fed chairman said it was unlikely to increase rates further. Powell also said, “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance or to speculate on when the policy might ease.” Even with positive indicators, the Federal Reserve will stick to its goal of getting inflation to 2% and plans to keep policy restrictive. The core inflation rate is 2.5% when annualized over six months, so we are heading in the right direction.


The 10-year treasury rate has had a fantastic ride in the last month. After hitting a seven-year high of 4.98% on October 18th, it began to slide downward, with the rate hitting a November high of 4.64% on November 10th. The 10-year treasury ended November at 4.22%. As of today (December 12th), the 10-year treasury rate is 4.22%.

More good news. Lenders have begun lowering rates based on treasury rate reductions. Be aware that several lenders continue to quote higher rates and require substantial deposits to fund loans. Many debt providers have continued to underwrite conservatively, quoting rates 100 basis points lower than the underwriting rate. This tactic is constraining the debt service coverage ratio (DSCR) significantly. This strategy is causing projects that would have qualified for a 70% LTV to sit around 50 to 60% LTV.


How does this affect you? Expect to bring more equity to the table for purchases. Proceeds for construction lending will be even more constrained than other debt products. When getting quotes for construction to permanent finance, expect that you may have to bring equity to the table because of the higher interest. Lenders have become concerned about the amount of consumer retail spending and expect it will not be sustainable at the current pace, deciding to limit exposure. Multifamily continues to be strong as it has the support of agency debt, and owner-user projects have many resources for debt, including non-SBA options. Borrowers should expect a lower loan-to-value constraint by higher interest rates and conservative underwriting practices that include adding additional spread to the expected quoted rate. Also, expect lenders to conduct more thorough due diligence and scrutinize borrowers' qualifications. I still have great resources to get around these issues.

November 2023 Financial Market Insight

I hope you're having a lovely day. There have been many changes in the commercial real estate lending market. This month, I briefly discuss the Federal Reserve's last meeting, the 10-year treasury rate roller coaster, and discuss an expert’s opinion of where the Federal funds target rate could go. Finally, I end with a Comparison of the 2008 crisis and today's economic issues.


First, A couple of pieces of good news: On October 19th, the 10-year treasury hit a whopping 4.98% (not the good news). The good news is rates came down considerably, as of today the rate is down to 4.42% This represented an impressive reduction of 56 basis points. I have received multiple communications from debt providers confirming that this reduction is trickling down to quoted rates. The Federal Reserve held rates steady at the last meeting on November 1st. Jerome Powell, the Fed Chairman, stated that the federal funds rate is expected to be higher for longer as we have a way to go to get to a 2% inflation rate, with inflation currently at 3.7% annually. According to the US Chamber of Commerce as of October 16th, there were 9.6 million job openings and only 6.4 million unemployed workers. Wages need to rise due to competition, and this is just one of several supporting data points for maintaining a higher for longer position.


Recently JP Morgan Chase Chairman Jamie Dimon, on CNN, stated that he thinks the federal funds rate could get as high as 7%. His biggest concern is the potential for long-term stagnation. He ended the article by stating that the consumer was in good shape. A 7% federal funds rate does not seem to be likely because the economic impact on floating debt would have significant consequences.


I frequently come across news that draws comparisons between 2008 and the present day. A recent article by Costar highlighted parallels between the last five years and the trajectory of the 2008 crisis. While there are indeed certain similarities, there are also noticeable differences. In 2008, banks stopped lending because of a mortgage-backed security issue in which subprime loans were being granted to homeowners with little qualification. Before the complete meltdown, large groups of investors began buying insurance that bet against mortgage-backed security debt. At its worst, the size of the insurance market, according to estimates, may have been three times larger than the total amount of the debt secured by homeowners.


Presently, property owners are grappling with a range of challenges. Much like the situation in 2008, there is a limitation on the issuance of debt. Today, we are contending with higher interest rates that are impacting commercial real estate, corporate debt, personal debt, and lenders' capital committed to long-term investment vehicles purchased when rates were lower. The issue for property owners is based on Simple math: if your commercial real estate has a $5 million loan floating or refinance debt moves from 3% - 6.7% (floating debt would typically be higher) and is based on 30 amortization payments would move from $252,970 a year to $387,166.78.


How does this affect you? If you have floating or existing debt that needs refinancing, get it done now! Borrowers should expect a lower loan-to-value constraint by higher interest rates and conservative underwriting practices that include adding additional spread to the expected quoted rate. Also, expect lenders to conduct more thorough due diligence and scrutinize borrowers' qualifications.



October 2023 Financial Market Insight


I hope this email finds you well. I wanted to share some essential details impacting commercial real estate interest rates.

As expected, the Fed has increased the target rate by another 25 basis points; this is the 11th increase. This increase places the Federal fund's target rate at a 22-year high.  The good news is that the Federal Reserve's economist has removed the possibility of a recession from their financial models. This positive development suggests a continued bullish outlook for the economy. The federal funds rate increases are expected to remain on hold; however, The Fed is data-driven and may have to increase rates further if the target inflation rate does not move from 3% to 2%. Rate cuts may not be on the horizon for some time, with many experts projecting the possibility of seeing them later in 2024.


Corporate profits have shown growth and strength due to long-term debt being locked into at very low rates and stock buyback programs.  Consumer confidence is on the rise, which has caused a surge in treasury rates. The 10-year rate reached over 4% again on July 26th.


The sentiment among lenders is varied, with some exiting the market while others are re-entering it, offering lower spreads and reasonable rates for well-qualified buyers.  Most lenders have owner-user financing options with higher LTV and good rates. On the investment side, Hospitality financing is beginning to rebound as occupancy rates continue to move in the right direction; retail financing has faced some pullback, despite high consumer confidence and spending. The office market is still experiencing lower occupancy and limited options for financing. Multifamily properties are enjoying the best rates; owners should realize that low cap rates will be difficult for lenders to utilize in the underwriting process in this higher interest rate environment. Industrial real estate remains of interest to debt providers. The best rates currently are for properties looking for debt between 3 million to 15 million.


How does this affect you? Lenders are offering competitive rates. Borrowers should expect a lower Loan-to-Value constraint by higher interest rates and conservative underwriting practices that include adding an additional spread to the quoted rate. Expect Lenders to conduct more thorough due diligence and scrutinizing of borrowers. Multifamily continues to have the most amount of financing opportunities as well as the most competitive rates. Hospitality has begun to intrigue some lenders as occupancy rates increase. Commercial property (non-residential) lenders are looking for properties that have longer-term leases to mitigate risk. Many lenders are also interested in owner-user properties and are willing to go up to 80% LTV based on the strength of the borrower.

 


September 2023 Financial Market Insight


Good news: Goldman Sachs has lowered its expectation of a recession in the next 12 months from 20% to 15%.

 

To add liquidity to the markets, Fannie Mae recently changed The Small Balance Loan program cap, increasing the cap from $6 million to $9 million for all loans committed as of August 22, 2023. This change should relieve some of the stress on the small-balance multifamily market.

 

Inflation continues to be of concern for the Federal Reserve in particular; Consumer spending has shown remarkable resiliency, with key economic indicators pointing towards the persistence of inflation, raising questions about the Fed's future moves.  At the beginning of 2023, the Fed predicted that by the end of the year, interest rates could be reduced or stay unchanged. New predictions have interest rates increasing further as inflation remains sticky.

 

The Treasury market continues to be volatile, causing lenders to change their lending strategies frequently. At the beginning of August, the 10-year Treasury was 4.05% and climbed to 4.34% on the 22nd, impacting interest rates. If I quoted a rate with a 250-point spread over the 10 years at the beginning of the month, the quoted interest rate would be 6.5%. On the 22nd, that same 250 basis points would translate to an interest rate of 6.84%. Given the current climate of caution and concerns about deposits, some lenders’ spreads have become even wider.

 

How does this affect you? There is plenty of reasonably priced debt if you know where to look. Borrowers should expect a lower Loan-to-Value constraint by higher interest rates and conservative underwriting practices that include adding additional spread to the expected quoted rate. Expect lenders to conduct more thorough due diligence and scrutinize borrowers' qualifications. 

 

Multifamily continues to have the most amount of financing opportunities as well as the most competitive rates. Commercial property (non-residential) lenders are looking for properties that have longer-term leases to mitigate risk. Many lenders are also interested in owner-user properties and are willing to go up to 80% LTV based on the strength of the borrower.

 


August 2023 Financial Market Insight


I hope this email finds you well. I wanted to share some essential details impacting commercial real estate interest rates.


As expected, the Fed has increased the target rate by another 25 basis points; this is the 11th increase. This increase places the Federal fund's target rate at a 22-year high.  The good news is that the Federal Reserve's economist has removed the possibility of a recession from their financial models. This positive development suggests a continued bullish outlook for the economy. The federal funds rate increases are expected to remain on hold; however, The Fed is data-driven and may have to increase rates further if the target inflation rate does not move from 3% to 2%. Rate cuts may not be on the horizon for some time, with many experts projecting the possibility of seeing them later in 2024.


Corporate profits have shown growth and strength due to long-term debt being locked into at very low rates and stock buyback programs.  Consumer confidence is on the rise, which has caused a surge in treasury rates. The 10-year rate reached over 4% again on July 26th.


The sentiment among lenders is varied, with some exiting the market while others are re-entering it, offering lower spreads and reasonable rates for well-qualified buyers.  Most lenders have owner-user financing options with higher LTV and good rates. On the investment side, Hospitality financing is beginning to rebound as occupancy rates continue to move in the right direction; retail financing has faced some pullback, despite high consumer confidence and spending. The office market is still experiencing lower occupancy and limited options for financing. Multifamily properties are enjoying the best rates; owners should realize that low cap rates will be difficult for lenders to utilize in the underwriting process in this higher interest rate environment. Industrial real estate remains of interest to debt providers. The best rates currently are for properties looking for debt between 3 million to 15 million.


How does this affect you? Lenders are offering competitive rates. Borrowers should expect a lower Loan-to-Value constraint by higher interest rates and conservative underwriting practices that include adding an additional spread to the quoted rate. Expect Lenders to conduct more thorough due diligence and scrutinizing of borrowers. Multifamily continues to have the most amount of financing opportunities as well as the most competitive rates. Hospitality has begun to intrigue some lenders as occupancy rates increase. Commercial property (non-residential) lenders are looking for properties that have longer-term leases to mitigate risk. Many lenders are also interested in owner-user properties and are willing to go up to 80% LTV based on the strength of the borrower.

 


July 2023 Financial Market Insight


Commercial real estate financing has undergone notable changes revealing a turbulent yet navigable commercial real estate financing marketplace. These include more conservative underwriting practices, reduced debt providers, higher federal scrutiny of lending loan portfolios, and increased sponsor scrutiny. The one bright spot is the Federal Reserve's decision to pause interest rates as inflation moves toward historical norms. This pause may be temporary and will be dependent on evolving trends.


ABR Commercial Mortgage. Conducted A recent survey of commercial real estate debt providers, categorizing them into three groups.


Active: Lenders actively engage in commercial real estate lending without significant changes in their operations or staff.


Partially Active: Lenders who have chosen to downsize their workforce and increase interest rate spreads.


Closed for business: Lenders who have temporarily closed their lending departments until further notice suspending commercial real estate lending activities.


What follows are additional examples of the changing Commercial real estate lending landscape.  Larger Spreads have been reported across a portion of the market, leading to higher interest rates. Traditionally spreads have sat 150 to 250 basis points above the quoted index. Today some lenders are quoting rates between 250 - 400 basis points above the quoting index. The spread increase is the primary reason for higher interest rates. The 10-year treasury as of the third of July was 3.86% in November when quoted rates were more competitive the ten-year was 3.89%. During the underwriting process, many lenders continue the practice of constraining LTV by adding a spread above their quoted rate. Debt providers continue to limit exposure to office properties, and some have stepped back from financing retail properties.


During its last meeting, the Federal Reserve paused interest rate hikes. This decision demonstrates the Federal Reserve's recognition of the need for a cautious approach in response to prevailing market dynamics. The Federal Reserve anticipates the potential for two new rate hikes. However, the timing and magnitude of these hikes will be subject to ongoing economic conditions and assessments made by the Federal Reserve.


How does this affect you? First, some lenders are offering competitive rates. Borrowers should expect a lower Loan-to-Value constraint by higher interest rates and conservative underwriting practices that may include adding a spread to the quoted rate. 

 


June 2023 Financial Market Insight


Over the past year, the news has focused on rising interest rates. The commercial real estate spaces had more issues due to the complexity of the capital markets. Stability in multifamily has been strong because of access to agency debt. There is no denying that a lot of the turmoil is based on the disconnection between Buyers’ and Sellers’ property pricing and the vanishing equity in real estate that has occurred from higher interest rates. The good news is that we're getting closer to the Fed’s target inflation rate of 2% a year.  Unfortunately, I expect another quarter-point increase at the Fed’s next meeting.

 

Market sentiment is fluctuating, with experts’ expectations of recession ranging from extreme to slight. Once inflation is under control, I expect a decrease in the federal fund’s target rate. This decrease should take place within the next 6 to 12 months. Let me be clear, I do not believe that interest rates will plummet again to the low-interest rates between 3% and 4%.

 

Fixed rates range from 5% to 7.8% for stabilized assets. Lenders offering fixed rates above 7% are not truly active in the market. Some debt providers charge upwards of 350 basis points above the quoted treasury rate. In contrast, less than six months ago, the typical rate would range from 175 basis points to 250 basis points for stabilized assets. These lenders are offering less than palatable rates utilizing this conservative approach, to be perceived as an active debt provider instead of as stepping back. Many smaller lenders have more commercial real estate debt in their portfolios than larger lenders. They require a conservative posture that includes higher federal scrutiny.


I continue interacting with lenders looking to place debt and have adjusted their interest rates accordingly. The 10-year treasury, for instance, is sitting at 3.689%. In October, the rate was as high as 4.24%. Agency debt for low-leverage multifamily provides the best opportunity. The best rate offered community is 164 basis points above the 10-year treasury.


There are capital providers who see this downturn as an opportunity. Properties with high LTV, needing to refinance, are finding shortfalls caused by commercial real estate price value reduction. The primary beneficiaries are providers of equity, mezzanine financing, private lenders, and debt funds.


How does this affect you? Finding lenders needing to deploy capital, produces the best terms and interest rates. The best rates continue for multifamily, industrial, and some retail. Expect that proceeds will be lower based on the change to quoted interest rates. The best rates for non-residential properties will be given to owners with well-qualified commercial tenants with longer lease terms. If you have a floating interest rate, refinancing should save you money.  The treasury yield curve continues to be inverted, which may make longer-term rates more attractive.