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INSIGHTS | Fed Consistent with Plan to Battle Inflation
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Fed Consistent with Plan to Battle Inflation

July 28, 2022 – By Matthew Swerdlow,   ; Matthew Dzbanek,   ; and Eli Weisblum,   , Ariel Property Advisors

At the Federal Open Market Committee’s fifth meeting of the year, policymakers voted to raise the federal funds rate by 75 basis points to a target range of 2.25% to 2.5%, as they continue to battle inflation, which rose to 9.1% in June, the largest 12-month increase in over 40 years. The July announcement follows rate increases of 75 basis points in June, 50 basis points in May and 25 basis points in March. Policymakers continue to execute an aggressive monetary policy as they strive to achieve the Fed’s goal of reducing inflation to 2%.

“While another unusually large increase could be appropriate at our next meeting (in September), that is a decision that will depend on the data we get between now and then,” Federal Reserve Chairman Jerome Powell said. “We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.”

Chairman Powell said that the FOMC will update its Summary of Economic Projections (SEP) before the September meeting as a guide for future actions. In the meantime, the Fed will continue operating under the June SEP which projected the federal funds rate would rise to 3.4% at the end of this year, 3.8% at the end of next year and 3.4% in 2024.

The day after the Fed’s rate announcement, the Commerce Department reported that real gross domestic product (GDP) decreased at an annual rate of 0.9 percent in the second quarter of 2022, following a first quarter decline of 1.6 percent. A recession is defined by some economists as two consecutive quarters of declining GDP.

During Wednesday’s press conference following his formal announcement, Chairman Powell responded to several questions about the likelihood of a recession, “I don’t think the U.S. is currently in a recession because many areas of the economy are doing well.”

“The good news is there is still a lot of capital in the market and banks nationwide are lending,” said Matthew Dzbanek, Senior Director in Capital Services at Ariel Property Advisors. “We’re seeing continued positive momentum for borrowers in the commercial real estate sector.”

Location and the asset type make a difference in today’s environment, Dzbanek noted. While lenders are still putting out loans, they are being selective about the sponsor, what they are lending on and where. For instance, lenders are still financing mixed-use properties in residential neighborhoods throughout New York City because local services such as liquor stores, dry cleaners, barber shops and restaurants are seen as “Amazon proof.''

However, Dzbanek cautioned that borrowers should expect lower loan proceeds due to rate increases because lenders want to ensure that a property’s cash flow is sufficient to service the debt.

“In this new environment, our team is actively introducing our clients to new equity partners and, for clients interested in selling, to a professional in Ariel’s Investment Sales Division,” Dzbanek said.

With rising interest rates, borrowers and lenders are adjusting to the new normal in which capital remains available but the terms have changed, making it even more important for borrowers to run a process to discover the best financing option.

Multifamily Loan Programs

Portfolio Lenders
Term Interest Rates
5 Year 4.90%-5.25%
7 Year 4.85%-5.25%
10 Year 4.75%-5.125%
Agency Lenders
Term Interest Rates
5 Year 4.87%-5.91%
7 Year 4.91%-5.70%
10 Year 4.77%-5.54%

Pricing current as of July 28, 2022 and varies with LTV and DSCR

*12 and 15 year terms available as well

Commercial Loan Programs

Term Interest Rates
5 Year 5.20%-5.50%
7 Year 5.125%-5.45%
10 Year* 5.50% - 6.00%

*full-term interest only available

Construction / Development / Bridge (Floating Over 1-Month Term SOFR)

Type Interest Rates
Stabilized / Core 250-450
Value Add / Core Plus 450-650
Re-Position / Opportunistic 650+
Construction / Development

Pricing current as of July 28, 2022 and varies with LTV and DSCR

Index Rates

Index Interest Rates
5-Year U.S. Treasury 2.74%
7-Year U.S. Treasury 2.76%
10-Year U.S. Treasury 2.71%
Prime Rate 5.50%
1- Month LIBOR 2.38%
30-Day Avg. SOFR 1.53%
1-Month Term SOFR 2.31%
Ameribor Unsecured Overnight Rate 1.74%
Index Interest Rates
5-Year SOFR Swap 2.48%
7-Year SOFR Swap 2.44%
10-Year SOFR Swap 2.51%

Pricing current as of July 28, 2022

TREASURY RATES

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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.