The U.S. Federal Reserve, as widely expected, left its benchmark short-term interest rate unchanged between 1.50% and 1.75% on Wednesday. In a statement following its first policy-setting meeting of 2020, the Federal Open Market Committee said its decision is “appropriate to support sustained expansion of economic activity.”
The economy is on solid footing right now, so the central bank has scant impetus to change its stance on monetary policy at this juncture. The Fed reduced interest rates three times in 2019 on concerns that weakness overseas and a trade war with China could disrupt the economy’s longest expansion in history. The Fed hit the pause button late in the year as these fears receded, with most policymakers forecasting no change in interest rates until at least 2021.
“With the three consecutive rate drops last year, rates are now at a three-year low and we expect them to hover around this range for the foreseeable future. We have seen a large increase in financing activity, with investors taking full advantage of these historically attractive rates,“ said Matthew Dzbanek, a Director of Capital Services at Ariel Property Advisors.
Following the Fed’s announcement, the yield on the 10-year Treasury note traded at 1.61%, about 30 basis points below its 2019 close. Interest rates on commercial loans are attractive right now, with ten-year multifamily loans roughly 25-50 basis points below where they were in January 2019.
Mounting fears that the lethal coronavirus outbreak in major Chinese cities is spreading across the world has weighed heavily on investor sentiment in recent days. Chinese health officials earlier this week said the virus was becoming more contagious, prompting investors to buy safe-haven government-backed Treasuries. Riskier assets, namely equities, sold off in tandem, but major stock indexes remain within striking distance of record highs. Overall, investors entered 2020 relatively upbeat, but the virus highlighted the economy’s vulnerability.
The 10-year yield has bounced from lows reached last summer as the U.S. and China, the world’s two largest economies, made progress with trade talks. Earlier this month, the two countries signed a trade deal that officials predict will foster a marked increase in sales of U.S. goods and services to China. Sanguine investor sentiment was further bolstered by a U.S. trade deal with Canada and Mexico.
A tight labor market remains the economy’s biggest bright spot. Employers added jobs for a record 10th straight year in December and the unemployment rate stayed at a 50-year low of 3.5%. At the same time, consumer spending, which accounts for more than two-thirds of economic output, remains robust. The National Retail Federation reported retail sales from the November through December holiday season rose to $730.2 billion, 4.1% higher than the same period in 2018.
However, there are certainly pockets of weakness, namely malaise in the manufacturing sector. The housing market appears to be losing steam despite low borrowing costs, with sales of new homes cooling for a third consecutive month in December.
Looking ahead, this year’s presidential and congressional elections will undoubtedly spur market volatility. Also high on radar screens is the possibility that Albany might pass a good-cause eviction law. Nevertheless, the market is awash with opportunities for investors who are focused on solid, risk-adjusted returns and there is a wealth of capital awaiting to be deployed.
MULTIFAMILY LOAN PROGRAMS
|5 Year||3.375% - 3.625%|
|7 Year||3.625% - 4.00%|
|10 Year||4.00% - 4.125%|
|5 Year||3.625% - 3.875%|
|7 Year||3.875% - 3.90%|
|10 Year||3.90% - 4.125%|
*12 and 15 year terms available as well
|COMMERCIAL LOAN PROGRAMS|
|5 Year||4.00% - 4.25%|
|7 Year||4.25% - 4.50%|
|10 Year*||4.50% - 4.75%|
|*full-term interest only available|
|Construction / Development / Bridge|
|Construction / Development||5.50% - 10.0%|
|Stabilized||4.00% - 6.50%|
|Value Add||5.00% - 8.75%|
|Re-Position||4.00% - 8.00%|
Pricing current as of January 29, 2020 and varies with LTV and DSCR
Pricing current as of January 29, 2020