Insights
INSIGHTS | Holding Rates Steady, Federal Reserve Paints Even Brighter Landscape for CRE Investors
COFFEE & CAP RATES PODCAST
Client Access

CLIENT ACCESS

Holding Rates Steady, Federal Reserve Paints Even Brighter Landscape for CRE Investors

June 17, 2021 – By Matthew Dzbanek,   ; Matthew Swerdlow,   ; Eli Weisblum,   ; and Ahron Sussman,   , Ariel Property Advisors

The Federal Reserve elected to maintain interest rates near zero, holding them at 0 to .25%, a widely anticipated move following the central bank’s efforts to accelerate a U.S. economic recovery as the pandemic recedes. As part of its decision, the Fed will continue to purchase $80 billion of Treasury securities and $40 billion of agency MBS per month until it deems “substantial further progress” has been made toward its goals of maximum employment and price stability.

The Fed’s decision to keep rates the same means cause for celebration by commercial real estate investors raring to close loans ahead of any impending rate increases. Lenders are removing Covid reserves, a bullish sign that they consider the worst is behind us and are ready to underwrite more commercial deals.

“And with rates below 3.00%, capital is still cheap. Savvy commercial real estate investors are purchasing or refinancing now to get ahead of the market and are willing to pay prepayment fees to do so,” according to Eli Weisblum, Director of Capital Services at Ariel Property Advisors. The firm is also seeing more national activity driven by bullish investors particularly looking at suburban office investments or NNN leased retail shopping centers in secondary and tertiary markets.

With abundant capital, investment demand is also driving strong pricing, fueling dispositions activity. Ariel’s Capital Services division is poised for one of its best years yet as commercial real estate investment activity roars back to life.

There is more reason to move quickly on property trades and refinancings, with a hint provided by the just-released Summary of Economic Projections. The Federal Open Markets Committee (FOMC) provided some guidance on coming increases, with 13 of 18 expecting to lift short-term rates by the end of 2023, compared to seven who forecast that move in March’s report. However, financial analysts and market players did not receive a specific timeline around the tapering of these asset purchases, which some in the market are calling for, citing rising inflation. Saying that the FOMC was awaiting more data, Powell said to refer to this months’ meeting as the “talking about talking about it meeting.”

In sharing the Federal Open Market Committee’s finding that the monthly change in PCE prices was 3.6% in April, Powell conceded that inflation has increased notably in recent months and will likely remain elevated in coming months before moderating.

“We are seeing upward pressure on prices from the rebound in spending as the economy continues to reopen,” Powell said. “Particularly as supply bottlenecks have limited how quickly production in some sectors can respond in the near term. These bottleneck effects have been larger than anticipated. As these transitory supply effects abate, inflation is expected to drop back toward our longer run goal and the median inflation projection falls from 3.4 percent this year to 2.1% next year and 2.2% in 2023,” Powell said.

U.S. economic health is absolutely on the mend, according to most indicators, with especially bright news for the labor market. With the pandemic releasing its hold on much of the country, both community and business activity is ramping up. Mask mandates are lifting, as is consumer spending. Meanwhile, jobs numbers are improving; as of May, the unemployment rate was down by 0.3% to 5.8%, while the number of unemployed persons reduced by 496,000 to 9.3 million. This is a marked improvement from the depths of the pandemic but there are some ways to go before reaching the employment levels before Covid-19: 3.5% unemployment and 5.7 million unemployed people in February 2020.

Looking ahead, FOMC participants forecast unemployment to drop to 4.5% at the end of this year, and drop again to 3.5% by the end of 2023.

“I would say if you look at the labor market and look at the demand for workers, and level of job creation and think ahead, it's clear and I'm confident that we are on a path to a very strong labor market, a labor market that shows low unemployment, high participation, rising wages for people across the spectrum,” said Powell. “That is shown in our projections, it's shown in outside projections. If you look through the current time frame and think 1 and 2 years out, we are going to be looking at a very strong labor market.”

Multifamily Loan Programs

Portfolio Lenders
Term Interest Rates
5 Year 2.85% - 3.25%
7 Year 3.25% - 3.50%
10 Year 3.50% - 4.00%
Agency Lenders
Term Interest Rates
5 Year 2.50% - 3.00%
7 Year 2.75% - 3.25%
10 Year 2.90% - 3.375%

Pricing current as of June 17, 2021 and varies with LTV and DSCR

*12 and 15 year terms available as well

Commercial Loan Programs

Term Interest Rates
5 Year 3.50% - 3.75%
7 Year 3.75% - 4.25%
10 Year* 3.75% - 4.25%

*full-term interest only available

**12 and 15 year terms available as well

Construction / Development / Bridge

Type Interest Rates
Stabilized / CoreStabilized / Core 2.25% - 4.50%
Value Add / Core Plus 4.25% - 5.50%
Re-Position / Opportunistic 7.00% - 9.00%
Construction / Development 4.25% - 5.75%

Pricing current as of June 17, 2021 and varies with LTV and DSCR

Index Rates

Index Interest Rates
5-Year Treasury 0.89%%
7-Year Treasury 1.29%
10-Treasury 1.57%
Prime Rate 3.25%
1- Month LIBOR 0.08%
SOFR 0.01%
Index Interest Rates
3-Year Swap 0.45%
5-Year Swap 0.86%
7-Year Swap 1.18%%
10-Year Swap 1.47%

Pricing current as of June 17, 2021

TREASURY RATES

Rates Chart

INSIGHTS ARCHIVE

The information contained herein has either been given to us by the owner of the property or obtained from sources that we deem reliable. We have no reason to doubt its accuracy but we do not guarantee the accuracy of any information provided herein. As an example, all zoning information, buildable footage estimates and indicated uses must be independently verified. Vacancy factors used herein are an arbitrary percentage used only as an example, and does not necessarily relate to actual vacancy, if any. The value of this prospective investment is dependent upon these estimates and assumptions made above, as well as the investment income, the tax bracket, and other factors which your tax advisor and/or legal counsel should evaluate. The prospective buyer should carefully verify each item of income, and all other information contained herein.