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INSIGHTS | Federal Reserve Cuts Interest Rates to Near-Zero to Mitigate Economic Effects of Coronavirus
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Federal Reserve Cuts Interest Rates to Near-Zero to Mitigate Economic Effects of Coronavirus

March 18, 2020 – By Matthew Swerdlow,   ; and Drew Chartash,   , Ariel Property Advisors


The Federal Reserve, in response to considerable volatility resulting from the coronavirus pandemic, has cut its key interest rate to near zero, a first for the central bank since the 2008 global financial crisis. The decrease of one percentage point is the second emergency cut this month and comes in the wake of the worst day for stocks in more than 30 years on March 12. The move was intended to position the market to build on the momentum of March 13’s rebound, when the S&P 500 rose more than nine percent. In a statement on March 15, the Fed noted, “The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the [Federal Open Market] Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent."

However, the rate cut demonstrates that the Fed “is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.” In addition to the rate cut, the Fed brought back Quantitative Easing (QE) which will “support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities,“ according to the FOMC’s statement. The central bank will increase its Treasury holdings by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion over the next several months, as well as reinvest principal payments from the Fed’s holdings of agency debt and agency mortgage-backed securities.

“Interest rates are poised to stay as low as possible for the foreseeable future,” said Matt Swerdlow, Director of Capital Services at Ariel Property Advisors. “Particularly if you’re looking to pivot your investments out of securities or money markets, income producing real estate represents a much more reliable asset, and the recent rate cut has created a prime opportunity to invest.”In response to the coronavirus, mortgage rates have reached the lowest average in 50 years. While the Fed dictates short-term interest rates, mortgage rates will adjust based on long-term bond rates, particularly the yield for the 10-year Treasury note, 1.026%, which has fallen to an all-time low and signals the continued lowering of mortgage rates, potentially down below three percent.

While the coronavirus situation creates a great deal of uncertainty, low interest rates and the federal government’s commitment to promoting growth at this time have created bastions of opportunity for commercial real estate investors in the market to refinance existing or acquire new properties. “In only two weeks, our division has recently put several debt placements into application among a myriad of lenders with rates below 3%. We’ve taken on a tremendous amount of activity in the last two weeks and we’re looking forward to advising our clients through this unprecedented series of events.” said Swerdlow.

MULTIFAMILY LOAN PROGRAMS

Portfolio Lenders
Term Interest Rates
5 Year 2.625% - 2.75%
7 Year 2.75% - 2.85%
10 Year 2.85% - 3.25%
Agency Lenders
Term Interest Rates
5 Year 3.125% - 3.375%
7 Year 3.50% - 3.75%
10 Year 3.75% - 3.90%

*12 and 15 year terms available as well

COMMERCIAL LOAN PROGRAMS
Term Interest Rates
5 Year 3.00%-3.25%
7 Year 3.25%-3.75%
10 Year* 3.25%-3.75%
*full-term interest only available
Construction / Development / Bridge
Term Interest Rates
Construction / Development 4.00% - 5.50%
Stabilized 3.00% - 4.50%
Value Add 4.50% - 6.50%
Re-Position 5.00% - 8.00%

Pricing current as of March 18, 2020 and varies with LTV and DSCR

Index rates
Index Interest Rates
5-Year Treasury 0.66%
7-Year Treasury 0.91%
10-Year Treasury 1.026%
Prime Rate 4.25%
1-Month LIBOR 0.75%
 
Term Interest Rates
3-Year Swap 0.59%
5-Year Swap 0.73%
7-Year Swap 0.85%
10-Year Swap 0.96%

Pricing current as of March 18, 2020

TREASURY RATES

More information is available from Matthew Swerdlow at 212.544.9500 ext.56 or e-mail mswerdlow@arielpa.com.

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.