Following Wednesday’s 50 basis points increase, Fed Chairman Jerome Powell apparently said that more aggressive rate increases are not possible. He said at a press conference, however that they were not considering any higher than that.
Powell stated at the presser that a 75-basis-point increase was not something that were being actively considered. This was reported by CNBC. I believe we have a good chance of having a soft landing or softish outcome.
After the Fed’s last meeting, speculation was rampantRates would be increased by more that 25 basis points. Review of the minutes of the March meeting suggested that the Fed balance sheet could be reduced by as much as $95 billion per month, through natural maturation of Treasuries or mortgage-backed securities.
Marcus & Millichap’s research shows that the expected rate trajectory is still below historical levels despite all the hand-wringing. According to the firms’ researchers, the market for commercial property was at its peak in 2005 and 2006 with a Fed Funds Rate as high as 5.3%, and a 10-year Treasury Rat as high as 5.23%. This is below the average 10-year Treasury Rate of 6.7% that has been observed over the past 50 years.
The Fed Funds Rate has been hovering around zero for over a decade. However the Fed is expected to keep interest rates at their historical lows with the planned Fed hikes, analysts have noted in a new report. It could have an effect on a market that has seen construction costs rise and cap rates shrink due to low interest rates. Despite this, history has shown that it is possible to have strong commercial real estate markets in a higher-rate environment than many people currently consider.
Fed policy seems to be emphasizing existing debt. Future rate projections are aggressively high, leading to higher interest rates cap costs and high swap spreads. Initial feedback from securitizations after last March’s rate hike is that spreads have almost equalized despite a significantly higher base index rate.
The report states that if this trend continues, interest rate will return to the mean. This makes assumable debt from the past few years extremely valuable and accretive for the next buyer. Some of the subdebt created during the pandemic could find a home in acquisitions. Assets that are stacked on top may have a lower cost than a full leverage permanent mortgage in the future.
Marcus & Millichap acknowledges that interest rates won’t fall soon, but they remain at their historic low.
Many are now more concerned about rate lock at application and forward rate locks than rate or leverage. The firm points out that this makes life company debt a more attractive option than taking on a large retrade before closing a CMBS execution. A decrease in the defeasance costs for loans that are currently securitized is one of the positives of the rate hike. Refinance loans less than one year before maturity may be an option for more owners. This will allow them to pay the reduced defeasance fee and recast their loan for a longer term at historically low interest rates.
Meanwhile, rates remain appealing for transitional assets, but Marcus & Millichap advisors say it still makes sense to ink deals now, before the risk of cap rate decompression and debt yield expansion plague higher-proceed alternatives.
