Financing Insight past News letter
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.
Loan Size: $1,500,000 to $300,000,000
Property Types: Multifamily, Office, Industrial, Retail, Flex, Mixed-Use, Senior Housing, Student Housing, Mobile Home Parks, Hospitality.
Product Types: Permanent Financing, Refinancing, Construction, Bridge Lending, Mezzanine Debt, Private Debt, Portfolio Debt.
Debt Providers: National, Regional, and Local Banks, Fannie, Freddie, HUD, CMBS, Life Companies, Credit Unions, Dept Funds.
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I wish you a prosperous 2024.