Q3 Capital Markets Update
published July 10, 2025
Pressure is Building on the Fed to Cut
As the Federal Reserve navigates a delicate balance between curbing inflation and supporting a weakening jobs market, pressure is mounting for interest rate cuts in 2025. With private sector job losses signaling economic cracks while tariffs threatening higher inflation, the Fed’s next moves could reshape the borrowing landscape through the rest of this year. In this shifting environment, "flexible" financing has become in many instances most important over rate.
The Fed is currently weighing inflation risks and the implications tariffs may have, and the economy with the private sector jobs market in contraction last month by 33k jobs. The last time the private sector jobs market was in contraction, ignoring a one-month blip in Covid, was 2010. While government jobs have remained strong, this shows cracks that the Fed is paying close attention to. Through the first half of the year, the average monthly job gain is 124k versus last year’s 168k.
The demand side of inflation has dropped off, making the Fed focused on the supply side with tariffs. Core PCE (which excludes food and energy costs) last week came in slightly higher than expectations, however weaker GDP and very weak consumer spending limited market volatility. Below is a composition of inflation through May with the green being supply-side, and the blue being demand side.
In Q4 2024 through Q1 of this year, consumer spending was hot, but dropped off significantly starting in March. If the inflation numbers stay down this month and next, the Fed will most likely cut at their September meeting, with another cut to follow in November. Fed officials’ recent statements reinforce this outlook:
- Fed Chair Powell: “I think if it turns out that inflation pressures remain contained, we will get to a place where we cut rates sooner than later.”
- Fed Bowman: "Should inflation pressures remain contained; I would support lowering the policy rate as soon as our next meeting."
- Fed Kashkari: “Maintain my outlook for two cuts over the remainder of 2025, implying a possible first cut in September, barring some surprising development before then."
- Fed Goolsbee: “Somewhat surprisingly, thus far, the impact of tariffs has not been what people feared…if we do not see inflation resulting from these tariff increases, then, in my mind, we never left what I was calling the golden path before April 2."
These statements collectively suggest a growing confidence among Fed officials that inflation is stabilizing, paving the way for rate cuts this year and into 2026.
What Lenders best fit this environment?
As 2025 maturities continue, finding competitive financing with sub-150-200 spreads remains extremely challenging for full-leverage requests. Given the market expectations of rates falling over the next 12+ months, we've been hyper-focused on negotiating flexible prepay structures. Credit Unions, banks, and debt funds have been the most competitive in this area as of late with large open windows if rates do come down. CMBS lenders are active where other lenders aren't, but with a defeasance prepay, not ideal in this environment. Most Life Companies want Yield Maintenance prepay, however, by creating a competitive bidding market between a Credit Union and Life Company on our latest financing, the Life Co. was willing to structure a 30-month minimum interest prepay on a 60-month fixed rate term.
Rate and Economic Indicators
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2 Year Treasury: 3.84%.
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10 Year Treasury: 4.33%.
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Term SOFR: 4.34% down from 5.31% 12-months ago: Market expectation at ~3.0% by Q4 2026.
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Unemployment Rate: 4.1%
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Core CPI: 2.8% YoY
Hot Money
Full-Term Interest-Only Perm Debt sized to 1.15x DSCR in the 5%'s
Loan Size: Up to ~$30 Million
Geography: West Coast and Florida
Property-Type: Multifamily, Mixed-Use, and Student Housing
Rates: Fixed in the 5.60-5.95% range.
Term: 3 - 7 years
Interest Only: Up to full-term dependent on LTV
LTV: Up to 70% LTV
Underwriting: 1.15x DSCR
Recourse: Non-Recourse & Recourse
Prepay: Stepdown negotiated
Recent Financing
Flex R&D Industrial Campus
$14.30 Million Cash-Out Refinance
Los Angeles, CA
Lender: Credit Union
- 48 lenders pitched
- 65% LTV, 1.25x DSCR
- 5.91% 3-Year Fixed Rate
- $3.3 Million Cash-Out
- Stepdown prepay open in Year 3
- No Deposit Requirements
- Negotiated a 20 bps lower rate 2-weeks prior to closing.
Lender Notes
Fannie Mae & Freddie Mac are offering competitive rates with spreads in the low-100's (with buydowns) to low-200's.
Life Companies remain active competing with spreads generally in the low to high 100's. Some are competing with early refinancing for pre-stabilized multifamily in lease-up.
Banks and Credit Unions are generally underwriting between 1.20x-1.25x DSCRs with rates in the 5.50%-6.50% for multifamily and industrial with other asset classes 25-50 bps wide.
CMBS is filling the void where properties don't qualify for other sources of capital, particularly office, but minimum Debt Yield requirements are limiting proceeds compared with alternative lending sources.
Bridge Lenders are underwriting their take-outs conservatively, however remain active with spreads generally in the mid-200's to mid-400's over Term SOFR. We have seen a few recourse bridge lenders quote in the 180-250 spread range.
Preferred Equity sources have remained active with some creativity around low current pays. General market terms remain at 7%/14%.
Construction Lenders are active, but conservative with focus on Sponsorship track-record.
Lender
Max LTV
Rates
Closing
Notes
Fannie/Freddie
5,7,10-Year Fixed
80%
5.10% - 6.25%
(buydowns available)
45-50 days
LTV & DSCR dependent
FHA Refinance
35-Year Fixed
85%
4.90% - 5.65%
120-150 days
not including MIP
Life Insurance
Companies
65%
5.10% - 6.15%
45-50 days
DY dependent
Bank, CMBS, &
Credit Union
70%
5.45% - 6.80%
45-60 days
DY & term
dependent
Bridge
Debt Funds
75%
6.50% - 9.50% +
Spreads of 2.0%+
14-45 days
LTC & stabilized DY dependent
Construction
Lenders
55%-80%
6.75% - 9.25% +
45-60 days
LTC & size
dependent
Tim Gerlach, CPA | Principal
CPA Lic. 130463 | Broker Lic. 02038912
Direct: 323-505-9222