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:

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Date                  Increase           Implied Fed Funds

Nov 2nd              0.75%                         3.75%

Dec 14th             0.50%                         4.25%

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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.  

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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.