Market Commentary

September 27, 2023

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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.

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