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Q3 Capital Markets Update

Bracing for Headwinds

The US has entered a recession every time both rates and commodity prices have increased at the same time, as they currently are.  The market is showing clear signs of slowing.  Re-trades and outright escrow cancellations are becoming more regular.  As rates continue to rise and buyers become more patient, general sentiment is that asking prices will come in over the next 3-12 months.  

 

When it comes to future rate expectations, all eyes are on inflationary data.  The Fed has made clear it will not slow down rate hikes until inflation is back under control. Powell has said the Fed's fight against inflation is "unconditional" and "we can't fail on this: we really have to get inflation down to 2%."  He later admitted a recession is "certainly a possibility."  The consensus inflation forecast this week is 4.8%, down from 5.3% in February. 

Below are anticipated rate increases for the remainder of the year:

 

Date          Approx. Increase     Implied Fed Funds

July 27th            0.75%                          2.25%

Sept 21st            0.50%                         2.75%

Nov 2nd             0.50%                         3.25%

Dec 14th             0.25%                         3.50%

While the yield curve has remained flat with periods of inversion, the 10-Year Treasury should dictate much of our "new normal" for the remainder of the year.  What would drive the 10-year to spike past the 3.0% - 3.50% range would be if the market believes inflation is no longer transitory or the Fed does raise rates that drive us into a recession.  If the market believes 10-year inflation will average over 3.0%, investors will not buy 10-year treasuries at 3% earning a negative return.

Lender Overview:

Banks, Credit Unions, and alternative lenders are winning deals today as their rate increases have continued to lag behind Life Companies, CMBS, and the Agencies.  Banks are generally offering 3-5 years interest-only on 5-10 year fixed terms with outliers in the mid-4%'s.  Fannie Mae and Freddie Mac are beginning to show signs of spread compression, particularly for rent rolls with affordability components.  Many bridge lenders have backed out of the market, which has pushed out spreads to 3.75%+ over Term SOFR.  Less options along with higher Cap costs and floating rate forward expectations have made value-add bridge deals harder to underwrite, especially when factoring in interest reserves that many deals require.  Today, a 3-year Cap on a $20 million loan with a 3.0% strike price is over $400,000.  We're focused on creative ways pushing permanent lenders in their underwriting to maximize initial loan proceeds along with structuring earn-outs. 

Rate and Economic Indicators

  • 10 Year Treasury at 2.80% from over 3% for most of the last few months:  The forward curve is pinning the 10-year around 3.0% for the next couple of years.

  • Term SOFR up to 1.73% and anticipated to climb further:  SOFR forward curve predicts a peak of 3.28% by February 2023. 

  • NY Fed Inflation Expectations

    • 1 Year Forward:  6.6%​

    • 3 Year Forward:  3.9%

Recent Financings

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Multifamily Portfolio
Portland, OR

$7.5 Million Loan

70% LTV, 5-Years Interest-Only

3.60% rate locked at signed App 

Fixed for 7-Years with flexible prepay

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Multifamily Portfolio
Warner Robins, GA

75% LTV, $2.77 Million Loan

4.09% rate locked at signed App 

5-Year Fixed

Non-recourse

Rates Today

Fannie Mae & Freddie Mac have tightened spreads to the 1.60% - 2.10% range.  

Life Companies have allocated away from real estate with their rates relatively less competitive.

Banks and Credit Unions are quoting deals with spreads as low as 1.35%-1.60% over the SWAPS.

Bridge Lenders are thinning out, but still quoting deals with spreads in the 3.75%-4.25% range over Term SOFR.

Lender

Max LTV

Rates

Closing

Notes

Fannie/Freddie

10-Year Fixed

80%

4.60% - 5.10%
 

45-60 days
 

LTV & DSCR dependent

Fannie/Freddie

10-Year Floating

75%

3.50% - 4.0%
 

45-60 days
 

LTV & DSCR dependent

FHA Refinance

35-Year Fixed

85%

4.75% - 5.40%
 

120-150 days

includes MIP

Life Insurance

Companies

75%

4.50% - 5.0%
 

40-50 days

DY dependent
 

Bank, CMBS, &
Credit Union

75%
 

4.20% - 4.90%
 

45-60 days
 

DY & term
dependent

Bridge
Debt Funds 

85%
 

5.25% - 6.0% +
Spreads of 3.75%+

14-45 days
 

LTC & stabilized DY dependent

Construction
Lenders

80%
 

4.50% - 5.75% +
 

45-60 days
 

LTC & size
dependent

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Tim Gerlach, CPA  |  Principal

CPA Lic. 130463  |  Broker Lic. 02038912

Reach out for a loan quote, prepay breakeven, or refinance analysis.

 

Direct: 323-505-9222

Email: Tim.Gerlach@StoneHarborCapital.com