“We have been seeing the effects of our policy tightening on demand in the most interest-rate-sensitive sectors of the economy, particularly housing and investment,” Fed Chair Jerome Powell said. “It will take time, however, for the full effects of our ongoing monetary restraint to be realized, especially on inflation. In addition, the economy is facing headwinds from tighter credit conditions for households and businesses, which are likely to weigh on economic activity, hiring and inflation.”

Powell said at the next Fed meeting in September, the Committee will make a decision to raise rates further or hold them steady based on economic data including two more jobs reports, two more CPI reports and the employment compensation index.

Rates Hikes Chill NYC CRE Market in 1H 2023

The Fed’s restrictive monetary policy has had an impact on investment property sales across New York City, said Eli Weisblum, Senior Director of Capital Services at Ariel Property Advisors. The rising cost of capital, along with fundamental changes in the office sector and regulations governing multifamily buildings contributed to the City’s investment sales market falling to $12.8 million in 1H 2023, a 42% drop compared to 1H 2022.

“The significant decline in investment sales across New York City illustrates that if owners don’t have to sell into this market, they won’t,” Weisblum said. “Mortgage maturities, however, are forcing some owners to make a decision to refinance at a higher interest rate, add more equity or sell.”

Investors, on the other hand, are seeing a buying opportunity if they can acquire repriced properties at a discount. Rent stabilized buildings in New York City, for example, are trading at 30% below what their value was before the Housing Stability and Tenant Protection Act (HSTPA) regulation passed in 2019 and owners of less desirable office properties are handing keys back to the lenders. However, even at a higher price, free market unregulated properties remain desirable despite higher interest rates because the cash flow for these assets will rise over time as rents increase annually.

Lending Market in Transition

Weisblum said, funds are still available for commercial real estate, however, balance sheet lenders are undergoing a significant transition due to anticipated regulatory scrutiny stemming from the bank failures earlier this year. Therefore, regional banks have tightened their requirements, often requiring borrowers to provide additional deposits of up to 10% to 50% of the loan as part of their negotiations. Money center banks such as JPMorgan Chase, however, which acquired the substantial majority of assets and assumed the deposits and certain other liabilities of First Republic Bank from the FDIC in May, are actively seeking new business but without the onerous depository requirements.

“Our relationships with lenders nationwide enable us to navigate the market during these uncertain times,” Weisblum said. “As a result, we are able to structure deals in the most beneficial way including securing waivers and negotiating more attractive terms for our clients.”

Looking Forward

Although we can’t predict if the Fed will increase rates again in September, the economic indicators cited by Chair Powell are encouraging. The labor market is in better balance with job openings falling, quit rates declining and the labor supply improving; supply chain disruptions are being resolved; at 3%, the inflation rate in June was better than expected; and the Fed staff is no longer forecasting a recession this year.

After experiencing the shock of rate spikes throughout 2022, the more moderate increases this year have been welcome and should result in a more predictable market as assets are repriced and investors move in to acquire them.