Last month the Fed went to ‘neutral’ on interest rates, which was a seminal shift in thinking. If that shift was seminal, then the announcement yesterday was ‘seismic’! For the fist time in almost two years, the Fed is talking about bringing rates down. I don’t think any of us in the commercial real estate market could have asked for a better Christmas present…
Does that mean ‘Happy Days are here again’? Probably, but it will take some time to filter through into lenders. Rates have only been part of the lending challenge. The other side has been longer term concerns for banks regarding their liquidity and as they term it ‘toxic loans’.
Now for the big ‘however’… Once the Fed actually begins cutting rates, the overall costs for banks will reduce which increases their liquidity and cash flow. And that in turn frees up their comfort in extending new credit. That is a slightly longer process which will get itself sorted fairly early in the year if Goldman Sachs is to be believed who is predicting 3 consecutive cuts. Here’s hoping!
On the other side you have the actual rates lenders will be using heading into 2024. And that’s where the really good news comes! The 10-year treasury is down now over 100bp from late November and moving down. One bond investor now believes we could see the 10-year at 3% by the end of 2024. What does that mean? If means interest rates back in the low 5% range – not the 7’s we’ve been saddled with for most of 2023. Given the rise in cap rates over the past 12 months and coupling that with the coming drop in interest rates, suddenly 70-75% financing will be back! Moreover, as an investor, the cap rate at purchase is fixed – interest rates fluctuate which means you can leverage a property now substantially now more than just 6 months ago while at the same time taking advantage of the rise in cap rates. It’s essentially a win on both sides since you have the opportunity to refinance once the rates come back down under 5%.
For the first time in over 6 months, I can now sound a very bullish tone going into 2024. I had lunch a few months ago with a commercial broker friend of mine who believed we would see a change early in 2024. At the time, that seemed farcical given the Fed’s tone. I can admit when I’m wrong, and I was wrong about that idea. Credit where credit is due – I think you were right Greg and we will see a big shift in January translating into significantly more activity
in late Q1 and definitely in Q2.
So where does that leave us? Happy days may not quite be here yet. BUT, better days are on the horizon which gives us hope. And heading into Christmas and a new year, I cannot think of any better present to receive. Thank you Mr. Powell and your fellow board members!
