Today’s post is written by Michael Green, Senior Commercial Loan Originator with Counsel Mortgage Group, LLC. Mike writes monthly on the commercial mortgage market. Check back each month for his commentary.
Where do you find the confidence to invest in CRE in the current economic and geopolitical environment?
In our BLOG 2 months ago, Jan. 25, I suggested that the market had been lulled into anticipating capital market behavior by Fed policies, i.e., watching the Fed Funds rate and gauging future actions by their narrative that followed the FOMC meetings. Now, however, given the new administration, Trump and Company, Fed policies and activities were not the bellwether they had been. And that now, the indicator to watch was the 10-year Treasury.
Now, if you’ve been watching the news, it’s abundantly clear that Trump wants interest rates to be lower.
New Treasury Secretary Scott Bessent said in a recent television interview, “In my talks with [the president], he and I are focused on the 10-year Treasury [yield].” The President mentioned it 5 times in an appearance on March 6 at the Economic Club of New York.
There are 2 primary reasons for trying to control (reduce)10-year yields.
- The hope that it would lead to economic growth, with businesses and individuals more easily able to borrow and spend more.
- Debt service cost reductions for the federal government.
Bessent and the administration can take at least 3 steps to try to create conditions that would put downward pressure on 10-year yields.
1. Shift Treasury strategies in debt auctions to favor more short-term instruments and fewer longer-term ones. If the number of 10-year auctions is limited, the government will reduce the supply of those Treasury Notes, which should mean higher prices and lower yields.
2. Change banking rules to reduce the Supplementary Leverage Ratio (SLR), a byproduct of the 2014 Basel III reforms, to improve bank stability by increasing capital on hand. The theory here is that banks would buy more 10-year Treasurys, increasing demand and, again, causing the price to rise and the yield to fall.
3. Cut government spending which would lower financing needs, reducing volume (supply), increasing prices, and lowering yields.
Will all this work? It’s too soon to tell. However, we note that yields on the 10-year have come down since Trump’s inauguration, from about 4.80% to a low of about 4.10%.
The geopolitical uncertainty, political theater, economic dislocations, both domestic and global, has many if not most investors sidelined. CRE financings being done are largely forced by maturing notes or personal hardships. We suspect that savvy investors have only a 3-6 month horizon to have an uncluttered playing field. By Q3-25 the trend will likely be known.
Siding with Trump gets you lower CRE acquisition prices, lower financing costs in a reducing interest rate environment, and ideally a lower tax structure going outbound.
To participate, find an aggressive CRE agent for your acquisition; contact your congressman to support a more favorable tax structure, and contact me for your lower financing cost loan. By the way, a lower cost loan is not just a lower interest rate … consider ALL of the terms and conditions, just as you would for your CRE acquisition.