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 frequency, or both) its purchases of $120 billion of bonds per month “soon”. Additionally, Fed officials were split 50-50 on an interest rate hike (sometime) in 2022 according to Oxford Economics, calling the meeting “slightly more hawkish.”

But what does that mean for commercial real estate? One of those good/bad news scenarios. “The tapering of bond purchases could result in a selloff of Treasuries,” David Pascale, Sr. V.P. at George Smith Partners, told GlobeSt.com. “This could increase interest rates for virtually all CRE permanent loans, which are typically priced over the 10-Year Treasury. Higher rates could lead to higher cap rates and therefore lower values for CRE assets nationwide.”

“It is assumed that tapering will boost the 10-year rate, as the Fed will stop buying so many Treasuries,” Robert Frick, corporate economist at Navy Federal Credit Union, says. “But that is probably a weak correlation at this point. So, mortgage rates are not likely to rise given the 10-year is not likely to rise much from tapering.”

But the “Fed (also) controls short-term rates, which affects construction loans,” Andrew Twito, V.P. of capital markets at Ryan Companies, told GlobeSt.com. “It might become a little more expensive to borrow to build what we’re building. But there’s still a good spread between the 10-year and a 5 cap. Historically, people look at the spread. Right not it’s not as low as it has been. Based on that, it looks like there’s still a bit of runway on pricing.”

Which is a good thing, especially if you’re building. If construction loan rates rise, Juan Segarra, President and CEO of Foresight Construction Group, predicts a potential “breaking point.”

“Depending on the market we’re talking about, developers will start to reconsider their options in terms of investments,” Segarra says. “I question whether there’s enough demand and money in the market, period, and if interest rates go up, whether it will have a major effect on whether people will invest.”

However, there are sectors like industrial, multifamily, and medical office that have been resilient and driving both higher values and rents, as Sundip Patel, CEO of Avana-EqualSeat, points out. These could act as a buffer to the industry with continuing demand.

Considering a term loan for your CRE investment, and/or maybe a construction or redevelopment/remodeling loan?  The CRE lending market acts in anticipation of events.  The comments above suggest lenders are already pricing rate hikes into their loans for both construction and CRE investment term and bridge loans.  If you’re borrowing window is 6-9 months or less, you may already be out of step with the lending market.

Give us a call – we may be able to help you catch up. We offer a variety of products and services, ask us how we can assist you today.

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