The Federal Reserve elected to hold the Target Rate at 5.25% – 5.50% at the September meeting, unchanged from current levels.
The Target Rate increased by 25 bps at the prior meeting in July, marking 11 increases since rate hikes began in early 2022.
Slowing job growth and a decline in Core CPI to 4.3%, down from 4.7% in the prior month, provided enough evidence for the Fed to pause on increases this month.
Chairman Powell’s comments emphasized that the economy is not out of the woods, and further increases are still a possibility. The non-increase was characterized as a “hawkish pause” by analysts.
Two Fed meetings remain in 2023, in November and December. The market is pricing in a 50% probability of one more increase in 2023, likely at the November meeting.
The SOFR Forward Curve anticipates rates peaking at 5.45% in January 2024, before commencing a gradual decline to 4.52% in January 2025.
The continued overall strength of the economy along with the possibility of future rate increases, is keeping the forward curve from showing a steeper decline.
5- and 10-year Treasury rates remain stubbornly high at 4.51% and 4.34%, respectively, and are projected to remain north of 4.00% through the end of 2024, based on the forward curve.
The most recent Fed survey of senior loan officers indicated that 65% – 70% of lenders tightened underwriting standards for construction, land and multifamily lending in Q3 v Q2.
Banks continue to pad and protect their balance sheets in anticipation of potential future write-downs of loan assets. Regulators have also increased pressure on lenders to reduce their exposure to commercial real estate on the heel of downgrades of many of the super-regional and regional banks by Moody’s and Fitch.
Most market participants are active, but high fixed rates and conservative underwriting standards make closing loans challenging.
Bank & Credit Union spreads in the +175 to +250 bps range drive all-in borrowing costs to the 6.00% – 7.00% range, pushing leverage down to 55% – 65% to meet DSCR constraints.
Life company quotes range from 5.75% – 6.75% with leverage spanning 50% – 60%. Only multifamily, industrial and retail borrowers need apply, with few exceptions.
CMBS lenders remain active, despite headwinds. 5-year, interest-only loans have become a new market standard as borrowers opt for shorter terms. Rates range from 6.75% – 7.50%, occasionally topping 8.00% for hospitality. Borrower options to buy-down rates or increase the open pre-payment period are popular add-ons. All major property types, including low leverage office loans, are being quoted.
With spreads starting at +300 bps and moving higher from there, floating rate loans for value-add and construction start at 8.30% and trend to the low double digits.
The Agencies, Freddie Mac in particular, have aggressive targets for Q4. Interest only has become more challenging, but rates from 5.75% – 6.50% make it an attractive option.
