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INSIGHTS | Federal Reserve Holds Interest Rates Steady, Remains In Status Quo Mode
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Federal Reserve Holds Interest Rates Steady, Remains In Status Quo Mode

January 30, 2020 – By Matthew Dzbanek,   ; and Drew Chartash,   , Ariel Property Advisors


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

Portfolio Lenders
Term Interest Rates
5 Year 3.375% - 3.625%
7 Year 3.625% - 4.00%
10 Year 4.00% - 4.125%
Agency Lenders
Term Interest Rates
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
Term Interest Rates
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
Term Interest Rates
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

Index rates
Index Interest Rates
5-Year Treasury 1.47%
7-Year Treasury 1.56%
10-Year Treasury 1.65%
Prime Rate 4.75%
1-Month LIBOR 1.65%
 
Term Interest Rates
3-Year Swap 1.46%
5-Year Swap 1.46%
7-Year Swap 1.50%
10-Year Swap 1.58%

Pricing current as of January 29, 2020

TREASURY RATES

More information is available from Matthew Dzbanek at 212.544.9500 ext.48 or e-mail mdzbanek@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.