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Q1 Capital Markets Update

published January 4, 2024

Lenders Optimistically Cautious

Lenders enter 2024 with caution but optimism that fundamentals will strengthen and they can place capital in strong loan scenarios.  While it is still largely a "Lender's market," we are seeing some of the banks and credit unions begin to lighten up on deposit requirements, or waive them altogether.  To start the year, Life Companies and REITS (public & private) are eager to get money placed.  While it remains challenging to find spreads under 1.90% for fixed rate loans, we're seeing some of these lenders willing to underwrite to a 1.20x DSCR.  We just signed a Loan Application from a REIT who was willing to underwrite to a 1.20x DSCR on an interest-only basis for a 5-year fixed term with full-term interest-only.


Our focus remains on sourcing lenders who will provide certainty of execution, ideally on balance sheet, as we've seen banks and credit unions step to the sidelines, or shut down lending operations altogether (ie- Kinecta, HomeStreet, First Foundation, Luther Burbank).  

2024 Predictions

1. We will see a recession this year.  The yield curve has been inverted for 18 months now, which historically has been the average amount of time before a recession takes hold.  Unemployment has already started climbing, and I believe it will continue to climb to above 5% this year with pressure in public markets on profitability and a drop in consumer spending.  While inflation is trending to 2%, much of the damage has already been done, but this will allow the Fed to justify their rate cuts to diminish the effects of a recession.  

2. The Fed has indicated 75 bps of rate cuts this year, but they will cut further as more signs of a recession show.


3. SOFR Cap costs will substantially fall.  Cap prices are tied to volatility, which will continue to fall.

4. Multifamily market fundamentals will remain strong, but rent growth will remain flat in most markets.  The cost of homeownership has gone up dramatically relative to renting, which will keep rental demand high.  Additionally, multifamily development will continue to slow as costs remain high and developers delay projects.  

5. Property valuations will come down further, in part by distress in the market with floating rate loans and maturities, but also driven by stagnant rents and increasing expenses, notably insurance costs.  Additionally, with the "risk-free" return on Treasury rates hovering around 4.0%, investors will continue to demand a healthy risk-adjusted spread.

Rate and Economic Indicators

  • 10 Year Treasury down to 4.0%.  The forward curve is pinning the 10-year in the high 3%'s for the next several years.

  • Term SOFR at 5.34% and expected to start its' decent this quarter:  SOFR forward curve predicts 3.30% by Q2 2025. 

  • Unemployment Rate: 3.70% remaining flat the past quarter.

  • Core CPI​:  ​4.0% for November 2023.  December data published January 11, 2024.​

Hot Money

High-Leverage Permanent Fixed Rate Financing

LTV: Up to 75% LTV

Underwriting: As low as 1.20x DSCR on an interest-only basis on current Rent Roll (no seasoning requirement)

Rates: Low 7.0%'s, but can utilize a rate buydown to get to the mid-6%'s

Property-Type: Most all except specialty-use properties

Geography: Nationwide Primary, Secondary, & Tertiary markets

Loan Size: $3 million - $100 million

Term: 5 & 10-year fixed

Interest-Only: Full-term available at max 65% LTV

Prepay: Yield Maintenance

Recourse: Non-recourse

Recent Financings

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Brand-new Multifamily
outside Nashville, TN

Lender: Life Company

 - 34 lenders pitched

 - Mid-6% rate locked at signed App (prior to drop in Treasuries) 

 - 5-Year Fixed, 10-Year Term

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Land Loan
Bethesda, MD

Lender: Private Fund

 - 53 lenders pitched

 - $12.50 Million Loan

 - 60% LTV, funded at closing

 - 12% fixed rate, 2-year term

 - Non-Recourse

Lender Notes

Fannie Mae & Freddie Mac are selective, but offer attractive spreads for the right deal with affordability. Buydowns have remained an accretive solution to increase loan proceeds by 2-3%.       

Life Companies are active and getting more creative on prepay structures, but still requires a deal "down the fairway."  Still a good option for pre-stabilized assets in lease-up. 

Banks and Credit Unions have loosened their deposit requirements.  Credit Unions have remained a great option for flexible prepayment terms.

CMBS remain the "lender of last resort" with high investor spreads. 

Bridge Lenders are actively looking for deals that pencil, with spreads often in the 300's over Term SOFR.  Stabilized Debt Yields generally need to be in the 8.50%+ range.  

Construction Lenders are being selective, with a focus on experienced Sponsors.  Leverage is lower with the banks around 55-60% LTC, which has created an opportunity for Debt Funds to compete for higher leverage requests with marginally higher spreads.






5-Year Fixed


5.50% - 6.25%

45-60 days

LTV & DSCR dependent

5-Year Floating


6.50% - 7.25%

45-60 days

LTV & DSCR dependent

FHA Refinance
35-Year Fixed


5.25% - 5.75%

120-150 days

not including MIP

Life Insurance


5.60% - 6.25%

45-50 days

DY dependent

Bank, CMBS, &
Credit Union


5.80% - 6.75%

45-60 days

DY & term

Debt Funds 


8.30% - 9.50% +
Spreads of 3.0%+

14-45 days

LTC & stabilized DY dependent



7.75% - 9.25% +

45-60 days

LTC & size

Food for Thought:  

Buying Down the Swap Rate

With the current rate volatility, if a lender has the ability to offer swaps, a beneficial hedge is locking a swap and buying down the rate to something below market.  This is an alternative to the common strategy of buying a deeply in-the-money cap, which can be beneficial if you want to retain the prepay flexibility.  The downside to a cap in today's market is that a substantial portion (around 30-40%) of the premium is attributed to time and volatility, and with a swap and rate buydown you'd avoid this portion of the cost, as swaps are only driven by rate expectations, not volatility.

The two primary risks of swapping are:

1. Not being able to float below the swapped rate if rates fall below your fixed coupon.

2. Having a swap breakage fee if you prepay early.

A few other benefits of swapping with a rate buydown are:

1. Negotiate for higher loan proceeds based on better debt service coverage.

2. Improve cash-flow of the deal Day 1 with the lower rate.

Tim Gerlach Headshot - smile.jpg

Tim Gerlach, CPA  |  Principal

CPA Lic. 130463  |  Broker Lic. 02038912

"There is nothing like returning to a place that remains unchanged to find the ways in which you yourself have altered." 
- Nelson Mandela

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