Q2 Capital Markets Update
published May 12, 2026
Rate Cuts Are Off the Table
April CPI came in at 3.8% year-over-year — the highest print since May 2023 — driven by a 28.4% annual surge in gasoline prices tied to the Iran war. The jobs report headline beat expectations with 115K added jobs but ugly beneath the surface with the loss of 424K full-time positions. The Fed is on hold, rate cuts are fully priced out of 2026, and hike odds are creeping back in. The swaps market is now pricing in a 55% chance of a rate hike by April 2027. For borrowers navigating $936B in maturities this year, the window for favorable refinancing assumptions has narrowed considerably.
THE ECONOMY: INFLATION, JOBS & THE FED'S DILEMMA: Today's April CPI report delivered exactly what the market feared: a 3.8% year-over-year headline, up sharply from 3.3% in March, and the highest level since May 2023. Monthly CPI rose 0.6%, with energy accounting for more than 40% of the entire increase.
The jobs picture is more complicated. Real wages turned negative for the first time in three years. Friday's April payrolls came in at 115K — nearly double the 65K consensus. However, beneath the surface, the Household Survey (which tracks actual employed people, not corporate payroll records) showed employment fell 226K. That's four consecutive months of declining household employment. Full-time positions dropped 424K while part-time rose 123K — a classic late-cycle rotation. Of the headline 115K, 391K were Birth/Death model statistical adjustments, not real hires. Government and education/health services drove the bulk of the gain. And there is historically around a 50K average downward revision over the subsequent two months of reporting.
RATES & THE FED: The swaps curve has done significant re-pricing since February. As the chart below shows, the February 27 curve (green) was pricing meaningful cuts into the 3.0% range by 2027–2028. The March 26 curve (pink) largely eliminated those cuts. The May 5 curve (yellow) has now crept back above 3.75% — edging toward the level that implies a hike — while the EFFR (blue) hasn't moved from the 3.50–3.75% target range.
The yield curve is re-steepening — not from optimism about growth, but from an inflation premium being built back into longer-dated instruments. If energy prices remain elevated (and resolution of the Iran conflict remains uncertain), the May CPI print (June 10) could push these levels further. Iran war developments remain the single biggest variable. Any ceasefire would compress energy prices and pivot the rate narrative back toward easing.
CRE LENDING - VOLUME UP, UNDERWRITING TIGHTENING: The composition of who's lending has shifted materially. Agency volume from Fannie and Freddie rose 35% YoY to $29.9B in Q1. All while Freddie dropped their small balance program for loans under $7.5 million, meaning no more 1.20x DSCR, but a 1.25x minimum. Alternative lenders — debt funds and mortgage REITs — now account for 53% of non-agency loan closings, up from 19% a year ago. Debt fund volume grew 280% year-over-year. Banks have pulled back to 22% share (down from 34%), and CMBS fell to 8% from 26%. The story of this lending cycle is debt funds filling the void left by cautious banks and a re-consolidating CMBS market.
The maturity wall hasn't gone away. Roughly $936 billion in CRE mortgages mature in 2026. Many of these were originated in 2019–2021 at sub-4% rates. Today's refinancing environment — with agency rates in the 5.25–6.10% range and bridge at SOFR + 3.50%+ — means debt service can jump 75–100% for borrowers whose NOI hasn't kept pace. Lenders are demanding 1.20–1.25x DSCR minimums, and deals with sub-9.5% debt yields are facing real headwinds.
Outlook: Expect spread widening on longer-term Agency paper in the near term as lenders reprice rate risk in response to the inflation shocks. Life companies, already selective at 60–65% LTV, may tighten spreads slightly into the back half of the year. Bridge lenders are expected to remain an active capital source and watching Term SOFR carefully (currently 3.63%).
Rate and Economic Indicators
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2 Year Treasury: 3.99% (up from 3.55% in early February pre-Iran)
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10 Year Treasury: 4.46% (up from 4.28% in early February pre-Iran)
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Term SOFR: 3.63%: Market expectation of ~3.85% by April 2027.
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EFFR (Effective Federal Funds Rate) Target: 3.50% – 3.75% (Fed on hold)
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CPI (April YoY): 3.8% — highest since May 2023
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Core CPI: 2.8% YoY (up from 2.6% in March)
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Unemployment Rate: 4.3% (down from 4.5% in Q4 2025)
Hot Money
Stretch Senior Debt - Up to 80% LTV with A/B Note Structure
Loan Size: $10+ Million
Geography: Primary and Secondary Markets Nationwide
Property-Type: All Major Property Types, except office and hospitality
Rates: Blended spread in the mid-200's over the 5-year treasury
Term: 5 years
Interest Only: 3 - 5 Years
LTV: Up to 80% LTV, at 1.0x DSCR on 25-30 year amortization and 1.25-1.30x interest-only DSCR
Recourse: Non-Recourse
Prepay: Stepdown
JUST CLOSED
Grocery-Anchored Retail Center
$12 Million Acquisition Loan
Coastal Florida
Lender: Life Company
- 54 lenders pitched
- 65% LTV, 1.30x DSCR
- 5.63% 7-Year Fixed Rate
- Full-Term Interest Only
- Stepdown Prepay
- Flexible Rate Lock
- Non-Recourse
OUT TO MARKET - $26M
Property: Retail - Heavy value-add
Source: Debt Fund
Term: 3-Years
Proceeds: $26M, 75% Loan-to-Cost
Rate: Top quotes - Term SOFR + 400's
SIGNING LOAN APP THIS WEEK - $10M
Property: Class A Industrial
Source: Life Company
Term: 7-Year Fixed
Proceeds: $10M, 65% LTV
Rate: 1.85% spread
Lender Notes
Fannie Mae & Freddie Mac: Agency volume surged 35% YoY in Q1. Rate buydowns remain a key tool. Expect some spread widening on 10-year paper near-term as the rate repricing flows through, but Agency remains the most competitive permanent source for qualifying multifamily assets.
Life Companies: Active at low-to-mid spreads for core assets with strong cash flow. Conservative underwriting (60–65% LTV, debt yield-dependent) means they're well-positioned to stay engaged but will be highly selective on property type and market.
Banks and Credit Unions: Generally underwriting at 1.20–1.25x DSCR with pricing pressure from floating-rate competition. Competing on prepayment flexibility. More willing to hold deals with existing banking relationships. Cautious on office and hospitality.
CMBS: Remains a compelling non-recourse alternative for properties needing max proceeds and that don't qualify for more competitive sources of capital.
Bridge / Debt Funds: Extremely active and more compelling option with Term SOFR continuing to fall. More flexible prepay and higher loan proceeds have become incredibly valuable at this point in the cycle.
Preferred Equity: Remains active with some creativity around low current pays. General market terms remain at 7% current, 14% total, but there are some outlier sources that can price in the 10-12% range.
Construction Lenders: Spreads have tightened competitively but underwriting focuses heavily on market, leverage, and sponsor track record. Most lenders want 55–70% LTC with proven sponsors. Cost of capital makes ground-up economics tight in most markets outside of industrial and select multifamily.
Lender
Max LTV
Rates
Closing
Notes
Fannie/Freddie
5,7,10-Year Fixed
80%
4.80% - 5.80%
(with buydowns)
45-50 days
LTV & DSCR dependent
FHA Refinance
35-Year Fixed
85%
5.0% - 5.70%
120-180 days
not incl. MIP
Life Insurance
Companies
65%
5.25% - 6.10%
45-50 days
DY dependent
Bank, CMBS, &
Credit Union
70%-75%
5.80% - 6.80%
45-60 days
DY & term
dependent
Bridge
Debt Funds
75-85%
6.50% - 9.50% +
Spreads of 2.0%+
14-45 days
LTC & stabilized DY dependent
Construction
Lenders
55%-80%
6.30% - 9% +
45-60 days
LTC & size
dependent
Analysis: Recourse vs. Non-Recourse in California (and other "Single-Action" states)
Key Takeaway: In California, the practical difference between recourse and non-recourse financing is much narrower than the labels suggest. The state's single-action rule and the overwhelming lender preference for non-judicial foreclosure mean that personal liability under a recourse loan rarely, if ever, materializes in practice — while the trade-off in loan terms can be substantial.
The Details: California Code of Civil Procedure §726 requires that a lender take two sequential steps before collecting on a debt secured by real property. This is not optional — it is the law, and it fundamentally shapes how recourse actually functions in practice.
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Action 1 (Required): Lender must first pursue the real estate through foreclosure — the property is the primary collateral and must be exhausted before any personal liability can be triggered.
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Action 2 (Rarely Taken): Only after Action 1 is complete may the lender pursue a deficiency judgment against the borrower/guarantor — and only via judicial foreclosure, which waives the non-judicial route.
What this means in plain terms: A lender cannot simply obtain a judgment against the borrower and start collecting personal assets. They must first go through the property. California courts have interpreted this rule broadly and in favor of borrowers. It was designed precisely to prevent lenders from double-dipping — pursuing both the collateral and the guarantor simultaneously.
THE FORECLOSURE ELECTION: WHERE THEORY MEETS REALITY
When a lender faces a defaulted loan, they have two foreclosure options in California. The election they make is permanent — they cannot switch paths after initiating one.
1. NON-JUDICIAL FORECLOSURE: The dominant path in California. Faster, cheaper, and far less burdensome for lenders — typically 4–6 months. However, by electing this route, the lender permanently waives any right to a deficiency judgment. The real estate is the only asset available to make the lender whole. In practice: this is the path taken in the overwhelming majority of California foreclosures — estimated at 95%+ of all defaults. A recourse loan, once in non-judicial foreclosure, is functionally non-recourse.
2. JUDICIAL FORECLOSURE: A full court proceeding — 1 to 2+ years in California and costly for both parties. Lenders elect this route only when they believe the property value will be significantly less than the loan balance, leaving a large deficiency they intend to collect from the borrower's personal assets. In practice: extremely rare. A lender only pursues this path if (a) they believe the property will sell well below the loan balance, (b) the guarantor has identifiable personal assets worth pursuing, and (c) they are willing to commit to a multi-year, expensive legal process. Even then, guarantors are only responsible for the deficiency after real estate proceeds are fully applied.
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Tim Gerlach, CPA | Principal
CPA Lic. 130463 | Broker Lic. 02038912
Direct: 323-505-9222
Let's discuss your deal.