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INSIGHTS | Federal Reserve Forgoes Rate Hikes In 2019
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Federal Reserve Forgoes Rate Hikes In 2019

March 21, 2019 – By Eli Weisblum,   ; and Remi Mandell, Analyst, Ariel Property Advisors


The Federal Reserve, signaling concerns about slowing growth, pared back their projected interest-rate increases, announcing there would be zero rate hikes in 2019, keeping its benchmark short-term interest rate unchanged at between 2.25% to 2.50%. In a statement following a two-day policy-setting meeting, the Federal Open Market Committee said it will be “patient” amid “global economic and financial developments and muted inflation pressures.” The Fed also said it would drawdown the central bank’s bond holdings at the end of September.

The Fed increased interest rates four times last year, but as financial markets became more unstable toward the end of 2018, the central bank announced they would take a more patient approach to monetary policy.

Indeed, looking at a broad measure of the consumer price index, prices rose 1.5% in February from a year earlier, the slowest pace since September 2016. The producer price index, which gauges the prices that businesses receive for their goods and services, climbed 0.1% during the same time span versus the 0.2% that economists had been expecting.

While the economy is on solid footing, the government’s shutdown earlier this year should dampen first quarter gross domestic product. The Federal Reserve Bank of Atlanta’s “GDP Now,” widely viewed as one of the most reliable predictors of GDP, is currently expecting economic output of 0.4% in the first quarter. U.S. growth fared better than expected during the fourth quarter of 2018, with GDP at 2.6%, down from the 3.4% growth rate in the third quarter, but better than the 2.2% that economists has been predicting.

The European Central Bank, in a move to stimulate growth in the euro zone, surprised markets earlier this month by announcing plans to hold interest rates at current levels at least through the end of the year, extending longer than it previously gestured. The ECB also unveiled a plan to issue new, cheap long-term loans for banks starting in September, an incentive it has not used for three years. The ECB’s announcement positively impacted U.S. government bonds because lower yields on European government bonds make higher yielding Treasuries more appealing.

The 10-year Treasury yield – which influences everything from mortgage rates and small business loans to state/government bonds and corporate loans – was last trading at 2.55%, down nearly 70 basis points since hitting a seven-year high last November. Yields could head higher should inflation, which diminishes the value of the fixed-payments made on long-dated bonds, pick up.

“It has certainly become cheaper to finance commercial real estate transactions since December 2018, so investors should pay close attention to economic movements because many balance sheet lenders price their loans daily, based off of a spread over Treasuries,” Weisblum said.

As the Federal Reserve takes a wait-and-see approach to monetary policy, real estate investors remain interested in financing and the lending environment is active. Borrowers across the country, investing in various asset classes, can choose from a countless amount of capital providers, while also enjoying relatively low rates.

MULTIFAMILY LOAN PROGRAMS

Portfolio Lenders
Term Interest Rates
5 Year 4.125% - 4.375%
7 Year 4.375% - 4.625%
10 Year 4.625% - 4.875%
Agency Lenders
Term Interest Rates
5 Year 4.32% - 4.51%
7 Year 4.48% - 4.65%
10 Year 4.64% - 4.80%

Pricing current as of March 20, 2019 and varies with LTV and DSCR

COMMERCIAL LOAN PROGRAMS
Term Interest Rates
5 Year 4.50% - 4.75%
7 Year 4.75% - 5.00%
10 Year 5.00% - 5.25%
Construction / Development / Bridge
Term Interest Rates
Construction / Development 5.75% - 7.00%
Stabilized 6.50% - 8.00%
Value Add 7.00% - 9.00%
Re-Position 9.00% - 11.00%

Pricing current as of March 20, 2019 and varies with LTV and DSCR

Index rates
Index Interest Rates
5-Year Treasury 2.42%
7-Year Treasury 2.51%
10-Year Treasury 2.60%
Prime Rate 5.50%
1-Month LIBOR 2.49%
 
Term Interest Rates
3-Year Swap 2.493%
5-Year Swap 2.462%
7-Year Swap 2.504%
10-Year Swap 2.600%

Pricing current as of March 20, 2019

TREASURY RATES

More information is available from Eli Weisblum at 212.544.9500 ext.41 or e-mail eweisblum@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.