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Q3 Capital Markets Update

published July 14, 2023

The Fed Keeps Pushing

The 2-Year Treasury hit a 16 year high at 5.0% as the markets reacted for another rate hike expected July 26th, as well as the expectation of a prolonged period before cuts begin.  The 10-year breached 4.0%, before retracting after the Inflation report on July 12th showed June inflation retracted to 3.0% from 4.0% in May.  Also, the weakest jobs report since the end of 2020 just came out along with the JOLTS survey that showed 500k fewer job openings than last month.  All of this and the Fed is still planning two more rate hikes this year!  I would not be surprised if they back off the second hike, especially if they really are focused on the soft landing they've preached the last year.  Coincidentally, their continued hiking may be the only impediment for this soft landing.

Core CPI YoY:

Core CPI YoY.png

The Inflation rate has gone down, falling by more than half from its peak of 9.1% in June of last year. Here's a look at the U.S. inflation rate since May 2022:

  • May 2022: 8.6%

  • June 2022: 9.1%

  • July 2022: 8.5%

  • Aug 2022: 8.3%

  • Sept 2022: 8.2%

  • Oct 2022: 7.7%

  • Nov 2022: 7.1%

  • Dec 2022: 6.5%

  • Jan 2023: 6.4%

  • Feb 2023: 6.0%

  • Mar 2023: 5.0&

  • Apr 2023: 4.9%

  • May 2023: 4.0%

  • June 2023: 3.0



How are lenders reacting to the Feds indications, despite the drop in inflation?  Many banks remain on the sidelines, as they push to bolster their deposits.  The banks that are lending have been adjusting rates upward over the past month to the 6%'s, and most of them want a depository relationship.  In most loan scenarios, Credit Unions are offering more advantageous terms, with more flexibility on prepayment penalties.  The Agencies also remain very active, and are competing well for lower leverage, interest-only requests.

With the fact that rates are pushing up, and may stay higher for longer, sourcing lenders with solutions to maximize loan proceeds is still problematic.  There has been an influx of Preferred Equity sources competing to help Borrower's bring the gap in their capital stack requirements, driving the cost of this capital down in the 10-12% range.

Office and retail remain incredibly challenging to finance, and to secure favorable terms, a great leasing story and location is required.  Multifamily and Industrial remain the preferred asset classes.

Hot Money

Fixed-Rate Permanent Loan Program

Rates: Fixed in the high 4%'s to low 5%'s

Property-Type: Stabilized Office, Mixed-Use Retail, Industrial, and occasionally Multifamily

Geography: California Bay Area up to Santa Rosa and Sacramento

Loan Size: $2 million - $10 million, occasionally higher on exception

LTV: Up to 65%.  

Term: 5 or 10 Years Fixed

Prepay: 5 or 6 year stepdown

Recourse: Typically Recourse, but open to non-recourse

Rate and Economic Indicators

  • 10 Year Treasury up to 3.81% after its' peak above 4% last week:  The forward curve is pinning the 10-year around 4% for the next few years, up from 3.50%.

  • Term SOFR up to 5.20% and expected to peak around 5.40% in November:  SOFR forward curve predicts 4.0% by end of 2024 and falling further from there. 

  • Unemployment Rate: 3.6%

  • Core CPI - 4.8%, down from 5.3% last month and the 6.64% peak in Sept. 2022.​

Recent Financing

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Mixed-Use Portfolio
Santa Rosa, CA

$7.0 Million Cash-Out Refinance

w/ earn-out components on all assets

6.29% fixed rate

7-Year Fixed, 10-Year Term

No Prepayment Penalty

Rates Today

Fannie Mae & Freddie Mac have reiterated their focus on affordability. Best rates are for 10-year terms, however, we're quoting some compelling loan structures with as little as 2-year yield-maintenance prepays, followed by 1.0%.  Additionally, buydowns have become an accretive solution to increase loan proceeds by 2-3%.      

Life Companies have become increasingly selective.  Many are not quoting.  There are some options for well located real estate, early rate locks, and pre-stabilized assets in lease-up. 

Banks and Credit Unions remain selective.  Many of the historically competitive banks are not quoting, such as Pacific Premier and HomeStreet, while others are trying to require heavy deposits in return for making a loan.  Credit Unions have remained a great option with many having no prepay penalty, although most are full-recourse lenders.

CMBS remain the "lender of last resort" with high investor spreads and generally lower leverage. 

Bridge Lenders are becoming harder to competitively source.  There are still groups hungry to place capital, some offering fixed-rates in the 8.0%-8.50% range to help Borrowers avoid purchasing SOFR caps.  

Construction Lenders are being extremely selective, with focus on either existing relationships, or experienced Sponsors with very strong deal and market fundamentals.  Leverage is generally lower around 60% LTC.  FHA remains a competitive option with construction loans that convert to 40-year amortizations with rates in the low-6%'s.







10-Year Fixed


5.30% - 6.30%

45-60 days

LTV & DSCR dependent


10-Year Floating


7.0% - 7.50%

45-60 days

LTV & DSCR dependent

FHA Refinance

35-Year Fixed


5.50% - 5.70%

120-150 days

not including MIP

Life Insurance



5.50% - 6.10%

45-50 days

DY dependent

Bank, CMBS, &
Credit Union


5.75% - 6.75%

45-60 days

DY & term

Debt Funds 


8.0% - 9.0% +
Spreads of 3.50%+

14-45 days

LTC & stabilized DY dependent



6.10% - 7.25% +

45-60 days

LTC & size

Food for Thought

Need to refinance a troubled property, but no options are available to take-out your existing loan?

See if offering the existing lender an equity kicker can help persuade them to refinance the current loan.  By offering the lender an option to convert a portion of the loan into an equity piece, a Borrower is lowering the new loan balance so the property can sufficiently service the debt, while giving the lender the benefit of being made whole on their at-risk capital, with upside potential to them.  This would prevent the Borrower from having to fire sell the asset if there is still upside being worked towards, or worse, handing the keys back to the lender.  This consideration makes the most sense where there is a property with a maturing loan that is cash-flowing, but the existing cash-flow cannot fully cover debt service to justify a cash-neutral refinance loan, and there are no other recapitalization options available.

Tim Gerlach Headshot - smile.jpg

Tim Gerlach, CPA  |  Principal

CPA Lic. 130463  |  Broker Lic. 02038912

"Nothing in the world can take the place of persistence.  Talent will not; nothing is more common than unsuccessful men with talent.  Genius will not; unrewarded genius is almost a proverb.  Education alone will not; the world is full of educated derelicts.  Persistence and determination alone are omnipotent." 
- U.S. President, Calvin Coolidge

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