The Fed’s quarter point bump in Dec. is now in the books. Their most recent forward guidance suggests two ¼ point increases in 2019 … but when? The early money says Jun & Dec.
Most every market prognosticator, soothsayer, psychic and analyst state that their market is “late in the cycle”. Which cycle that is depends on which market you’re talking about. What we’ve observed over the last few months is enhanced volatility in the public markets (stock, bond and derivatives), reflecting increased uncertainty in the investment environment.
What I’ll remind you of is that money is mobile. It’s director/decision maker will allocate funds to the optimal risk:reward opportunity at any point in time. Today money is said to be moving to the “risk off” arenas. What has crossed our desk recently without much fanfare is that institutional investors are increasing their allocation to CRE … how many, how much, how soon wasn’t detailed.
Government regulated lenders (national banks) tend to pull in their horns at the end of cycles, particularly with the memory of 2007-2009 still fresh in their memories. This opens the door to increased opportunity for non-bank lenders, e.g., private money. To that end private funds have been particularly active and successful in attracting CRE debt money, and equity also I assume.
Since money is not only mobile, but global, off shore investors have been converting their rupees, dinar, won, yen, and yes, yuan, into greenbacks to access good old USofA real estate … or fund loans on the same. Capital funds are flowing on shore!
The late-in-the-cycle effect hasn’t become pronounced yet among conventional lenders. I expect that will morph into tightening lending standards (raising the bar on underwriting) in 2019. CRE cap rates on all asset classes haven’t risen in lock step with the Fed’s interest rate hiking, which is all the more notable when considering they’re also normalizing their balance sheet at an advertised rate of $50 billion per month. (At this rate they will be “normalizing” for about 3 years to get from their present $4+ trillion to about $2 trillion – deemed to be the present day level of “normal”.) The effect on liquidity of the Fed’s QT program is an equivalent of raising rates by about another 1%. So the combined effect of the Fed’s interest rate hikes plus QT is more like a 2% rate hike. And still, cap rates haven’t reacted all that much – in all sectors.
The search-for-yield folks are happy, but they’re getting nervous. The uncertainty and volatility are spreading among markets, and among asset classes within markets. Maybe it’s time to get into some boring-but-sleep-good-at night CRE income property. Maybe it’s time to cash in my Loonies and go to USDs. But where to go for financing? CRE financing always seems so complex, almost like speaking a foreign language … and the documents and contracts. And if I get into a loan, how do I get out?
Might I suggest a counselor mortgage broker … a Counsel Mortgage broker.
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