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Q4 Capital Markets Update

published October 5, 2022

The Fed's Fight

The Fed has not raised rates more than 75 basis points in an entire year since the 80's.  They've raised rates by 75 basis points three times so far this year and have signaled another 125 basis points by the end of the year.  The yield curve remains inverted.  The big question is how quickly inflation will course correct to normal levels.  Until we see real signs of this, the Fed will continue to raise rates into 2023.  

 

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

Date                  Increase           Implied Fed Funds

Nov 2nd              0.75%                         3.75%

Dec 14th             0.50%                         4.25%

Real estate volume is down as deals become harder to underwrite with the new financing realities of negative leverage.  For value-add deals, interest reserve holdbacks, SOFR Cap costs, and widening spreads are contributing to a more hesitant buyer pool.  This has led to price reductions in most all markets.  

Lender Overview:

Banks and Credit Unions remain competitive with rates in the mid to high 5% range, although many are limiting interest-only and increasing debt service coverage requirements.  Alternative private lenders and funds remain an attractive option to lock in fixed rates and creative structures to maximize proceeds.  Fannie Mae and Freddie Mac's inability to rate-lock at a signed application for loans over $6 million exposes deals to fluctuations in treasury rates which impacts loan proceeds at final underwriting.  Life Companies and CMBS are less compelling today, although still winning business for the right deals where better options do not exist. 

 

Many bridge lenders who rely on the CLO secondary markets remain on the sidelines, which has pushed out spreads even further to 4.50%+ over Term SOFR, making value-add bridge deals even harder to underwrite,

 

Floating Rates:

The forward curve looks drastically different from a month ago.  Instead of a peak at 4.0% followed by a sharp decline, it now peaks around 4.40% and stays above 4.0% until March 2024.  This has real implications for all floating rate borrowers, and the reason fixed rate alternatives have become compelling.

Forward Curve - 10.05.2022.png

Rate and Economic Indicators

  • 10 Year Treasury at 3.76% after peaking over 4% last week:  The forward curve is now pinning the 10-year around 3.60% for the next couple of years.

  • Term SOFR up to 3.11%:  Forward curve predicts a 4.40% peak by February 2023. 

  • NY Fed Inflation Expectations down:

    • 1 Year median expectation:  5.7%​

    • 3 Year median expectation:  2.8%

Rates Today

Fannie Mae & Freddie Mac spreads are 2.0% +/- 25 basis points based on size, affordability, and green waivers.  

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

Banks and Credit Unions are quoting deals with spreads of 1.40%-1.80% over the SWAPS.

Bridge Lenders are thinning out, but still quoting deals with spreads in the 4.50%-5.0% range over Term SOFR.

Lender

Max LTV

Rates

Closing

Notes

Fannie/Freddie

10-Year Fixed

80%

5.50% - 6.25%
 

45-60 days
 

LTV & DSCR dependent

Fannie/Freddie

10-Year Floating

75%

5.0% - 5.50%
 

45-60 days
 

LTV & DSCR dependent

FHA Refinance

35-Year Fixed

85%

5.75% - 6.45%
 

120-150 days

includes MIP

Life Insurance

Companies

70%
 

5.60% - 6.10%
 

40-50 days

DY dependent
 

Bank, CMBS, &
Credit Union

70%
 

5.60% - 6.20%
 

45-60 days
 

DY & term
dependent

Bridge
Debt Funds 

80%
 

7.50% - 8.50% +
Spreads of 4.50%+

14-45 days
 

LTC & stabilized DY dependent

Construction
Lenders

80%
 

6.75% - 8.50% +
 

45-60 days
 

LTC & size
dependent

Recent Financings

Recent Financings

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Value-Add Multifamily
Lincoln City, OR

60% LTV, 5.12% rate locked at signed App 

5-Year Fixed, Full-term Interest-Only

Flexible step-down prepay

Non-Recourse

Recent Financings

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50-Units non-contiguous
Buford, Atlanta, GA

$5,10 Million Value-add Bridge Loan

75% LTV, 30-day closing

Fixed rate locked at signed App 

Structured as 25 separate loans for each parcel to allow for best refinance options.

No interest reserve

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Tim Gerlach, CPA  |  Principal

CPA Lic. 130463  |  Broker Lic. 02038912