Recent tightening monetary policy has brought to the forefront lenders utility of rate swaps and caps for CRE loans. With the stable interest rates of the past decade or so, these were largely kept in the closet. CRE investors have long had multiple avenues for hedging against rising interest rates. With the FED’s commitment to raising interest rates, however, renewed by higher-than-anticipated inflation, CRE lenders have brought these tools out as standard fare. For investors with floating rate debt, there are two prominent tools (options) to hedge against rate climbs: an interest rate swap and a cap. A swap...
Commercial Loans
IT’S DEJA VU ALL OVER AGAIN
It’s said in investment circles that markets have a memory of about 20 years. Lessons learned more than 20 years ago are forgotten. Those of us around during the inflation of the ‘70s are hard pressed to recall the details. Many of the commercial real estate and financing professionals and practitioners during the 2005-2008 run-up to the Great Financial Crisis (2008-2010) are hard pressed to echo the lessons learned, or even the causes. If participation didn’t leave a financial scar, it’s likely faded from memory. And so here we are – again – with 8+% inflation and...
May 28, 2022May 28, 2022john
THE MARKET’S REACTION/OVER REACTION TO INFLATION
Actually, the market reacts to two inputs for inflation: the economic numbers themselves, primarily CPI and PPI, and also the Fed’s actions, either reactive or proactive, to the inflation metrics. Current Market Drivers The US labor market is tight and supply chains stay stressed. The Russian-Ukraine war exasperates commodity pricing. The financial system stressed from sanctions against Russia. US inflation setting records. March CPI over 8%; PPI over 11% The Fed under pressure: QE has turned to QT. The inverted yield curve persists with the different debt markets responding in an asynchronous fashion. Results: volatility. But to...
April 29, 2022April 29, 2022john
COMMERCIAL BRIDGE LOANS
One of the loan types that has come into demand recently is a bridge loan. They’re typically used in situations where there’s stress in the situation resulting in a bargain element in the pricing, and time is a material factor. (Our current environment is causing a lot of this.) We have a fair amount of discussion about the terms and conditions of these loans, a lot of it dispelling misinformation floating around the market. We continually get calls & emails from lenders looking for deals to fund. This is normal – the pulse of our business. We can arrange funding...
April 10, 2022April 10, 2022john
SPEEDING UP YOUR LOAN UNDERWRITING PROCESS
The CRE investment market should continue “hot” into 2022 as new capital enters the fray and inflation mount – the question is whether the lending industry can keep up the borrower demand. “Sellers will continue to drive terms and command short escrow periods for top-notch properties,” per Rob Murphy, Vice President of Structured Finance and Capital Markets at Transwestern. (Source: GlobeSt.com) Low interest rates have been fueling the CRE market for years. Staffing shortages and the supply chain issues have added additional stress to closing timelines that previously had been met in somewhat an expected fashion. While...
March 1, 2022March 1, 2022john
BE PREPARED FOR A MORE AGGRESSIVE FED
The FOMC made it clear on Wednesday, 2-2, (as clear as they make anything) that rate hikes are imminent. Chairman Powell projected a hawkish tone in his post-meeting press conference leaving open the possibility of several sequential rate hikes this year. A 125 bps (basis points) total rate increase this year (five 25 bps hikes) is now almost a certainty, according to the fed funds futures market. (See chart , 1-31-22) Wells Fargo’s Economic Department offers the following opinion (1-28-22): We now think it is likely that the Committee will hike rates by 25 bps at the March 16, May...
February 7, 2022February 7, 2022john
FED TO ACCELERATE TIGHTENING, WITH AS MANY AS THREE RATE HIKES IN 2022
As recently as March, the Fed wasn’t expected to raise rates until 2024. Now, the central bank could implement as many as three rate hikes next year. The Federal Reserve is tightening up its pandemic-era easy money policy and will increase the pace of tapering, a move that could usher in rate hikes earlier than expected, according to a statement released at the conclusion of the central bank’s latest policymaking meeting. In light of inflation developments and the further improvement in the labor market, members of the Fed’s policymaking committee voted unanimously to wrap up its massive bond-buying...
December 31, 2021December 31, 2021john
SIGNS OF THINGS TO COME
At the beginning of November, the Fed announced that it would begin tapering its $120 billion per month asset purchasing program by $15 billion monthly. The pace of that tapering will remain closely watched over the coming year, as the Fed will continuously be juggling its dual goals of bringing long-term inflation to 2% while supporting the recovery of “full employment.” While the post-COVID economic recovery has had a quick start, there are a number of predictions that continue to miss, from inflation rates to the pace of job growth. For real estate investors, two things appear clear....
December 3, 2021December 3, 2021john
CRE MORTGAGE DELINQUENCIES CONTINUE DECLINE
Delinquency rates of mortgages backed by commercial and multifamily properties have broadly improved in recent months, the Mortgage Bankers Association (MBA) reported this week. “Performance is still property-type dependent, with the properties that saw the most immediate and dramatic impacts from the pandemic – lodging and retail – still experiencing considerably more stress than others, but showing improvement,” said Jamie Woodwell, MBA’s VP of commercial real estate research. “Delinquency rates are down significantly for those property types and remain muted for others.” Laid against this backdrop, the Federal Reserve is saying that it will start to taper off (reduce buying volume or...
October 1, 2021October 1, 2021john
CRE MORTGAGE DELINQUENCIES CONTINUE DECLINE
Mortgage delinquency rates, which have been a bellwether of distress in the CRE sector during the pandemic, are continuing to improve. One area of concern, however, is that elevated levels of delinquencies in the lodging and retail sectors are expected to linger as troubled loans slowly work toward resolutions, with some defaults expected. There are still a lot of “what ifs” that will influence how the amount of distress in CRE will play out. Some believe that distress has peaked and is gradually being worked out. Others think there could be more flare-ups of distress ahead in certain pockets,...
September 1, 2021September 1, 2021john