Federal Reserve policymakers voted to leave the target range for the federal funds rate unchanged at between 5.25% to 5.50% for the eighth consecutive meeting. However, if economic indicators continue to trend in the right direction, a rate cut could be on the table as early as the next meeting in September, Fed Chair Jerome Powell said Wednesday.
“We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent,” Powell said. “The second-quarter’s inflation readings have added to our confidence, and more good data would further strengthen that confidence.”
Total personal consumption expenditures (PCE) prices rose 2.5 percent over the 12 months ending in June. Excluding the volatile food and energy categories, core PCE prices rose 2.6 percent.
Positive Economic Indicators Raise Optimism
“For the first time in over two years, the stars appear to be aligning,” said Matt Swerdlow, Senior Director in the Capital Services Group at Ariel Property Advisors. “The economic data tracked by the Fed is close to reaching a Goldilocks moment, which has generated a buzz among Fed watchers, many of whom are now forecasting not just one rate cut but three at the remaining meetings in September, November and December.”
Notably, Q2 2024 Real GDP grew by 2.8%, faster than 1.4% in the first quarter and above the 2.1% forecast, which shows the economy is on decent footing and reinforces hopes of a soft landing.
The favorable economic indicators including inflation and jobs data have already helped push Treasury rates down 40 bps in recent weeks.
Mortgage Maturities Driving Sales
“Nationwide, $900 billion in loans secured by commercial real estate are maturing this year so any interest rate drop will be a welcome relief to owners facing mortgage maturities,” Swerdlow said. “In this ‘higher for longer’ rate environment, many investors have been forced to decide whether to sell their properties or put cash in and refinance at a time when rates are elevated, a trend we expect to continue.”
The Fed rapidly increased interest rates over 11 consecutive meetings beginning in March 2022 with policymakers voting on their last increase of .25% a year ago in July 2023. The fed funds rate has remained between 5.25% to 5.50% since then.
Mortgage maturities are credited in part with the increase in investment sales activity in New York City in the first six months of the year. The dollar volume of sales rose by 26% in 1H 2024 from 2H 2023 to $11.79 billion and transaction volume increased by 11% to 943 trades over this period, according to research by Ariel Property Advisors.
Renewed Debt & Equity Activity
“The renewed commercial real estate activity has led to some positive developments including new lending firms opening offices that didn’t exist 12-months ago,” Swerdlow said.
On a recent assignment, Ariel Property Advisors procured a term loan for a 16-unit multifamily building from a non-bank lender who just entered the space in 2023. This loan provided fixed rate, 5-year financing at 70% LTV subject to a 1.15x I/O DSCR, full term interest only payments, non-recourse guarantees, and a 5-4-1-1-1 prepayment penalty with no depository requirement since the lender is not a bank.
This multifamily transaction underscores a trend the Ariel’s Capital Services team identified in an article published in New York Real Estate Journal in October 2022 that highlighted the void in the market stemming from the massive wave of bank merger activity, which has been exacerbated by the banking crisis of 2023. Simply put, few new banks are being opened and that is creating an opportunity for private credit funds to gain market share by replicating the structure of a term loan without the governance or regulations of a traditional depository institution. These groups can lend nationally against all multifamily assets.
On another assignment, Ariel was engaged to refinance a six-building portfolio in the South Bronx for a borrower facing a cash-in refinance. The resulting lender matrix (a side-by-side comparison of loan alternatives), outlined several options that again provided full term interest only payments, non-recourse guarantees, and no depository requirements. The top lenders were 10% higher in proceeds than Fannie Mae and Freddie Mac and 30% higher in proceeds than the traditional incumbent banks.
“While it’s too early to pop the champagne, it’s encouraging to see new lenders entering the market with terms that are sensitive to the needs of commercial real estate borrowers,” Swerdlow said.
Multifamily Loan Programs
| PORTFOLIO LENDERS | AGENCY LENDERS | |||||||
| Term | Rates | Term | Rates | |||||
| 5 Year | 5.50% – 6.50% | 5 Year | 5.18% – 6.22% | |||||
| 7 Year | 5.50% – 6.50% | 7 Year | 5.16% – 5.97% | |||||
| 10 Year | 5.60% – 6.60% | 10 Year | 5.18% – 5.88% | |||||
Commercial Loan Programs*
| Term | Rates | ||
| 5 Year – Bank | 6.50% – 7.00% | ||
| 7 Year – Bank | 6.50% – 7.00% | ||
| 5 Year – CMBS** | 6.00% – 6.50% | ||
| 10 Year – CMBS | 6.00% – 6.75% |
Construction/Development/Bridge (Floating Over 1-Month Term SOFR)
| Type | Spread (bps) | ||
| Stabilized / Core | 275 – 350 bps | ||
| Value Add / Core Plus | 350+ bps | ||
| Re-Position / Opportunistic | 350+ bps |
Index Rates
| Index | Rates | Index | SOFR Swap | |||||
| 5-Year Treasury | 3.92% | 5-Year SOFR Swap | 3.78% | |||||
| 7-Year Treasury | 3.95% | 7-Year SOFR Swap | 3.73% | |||||
| 10-Year Treasury | 4.03% | 10-Year SOFR Swap | 3.74% | |||||
| Prime Rate | 8.50% | |||||||
| 30-Day Avg. SOFR | 5.35% | |||||||
| 1-Month Term SOFR | 5.34% | |||||||
| Ameribor Unsecured Overnight Rate | 5.44% | |||||||
More information is available from Matthew Swerdlow at 212.544.9500 ext.56 or e-mail mswerdlow@arielpa.com.