“Inflation (3.7% in August and September) has moderated since the middle of last year, and readings over the summer were quite favorable,” Fed Chair Jerome Powell said. “But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. The process of getting inflation sustainably down to 2% has a long way to go.”

In addition to 11 rate hikes totaling 5-1/4 percentage points between March 2022 and July 2023, the Fed has sold over $1 trillion in securities over the last 16 months as part of its restrictive monetary policy.

Chair Powell noted that real GDP in the third quarter rose to an “outsized” annual rate of 4.9%, payroll job gains averaged 266,000 jobs per month over the last three months, and the unemployment rate at 3.8% remains low. However, financial conditions have tightened significantly in recent months, driven by higher longer-term bond yields and other factors including the stronger dollar and lower equity prices.

Market Responds to Powell’s Announcement

“The morning after the Fed’s announcement, the 10-year Treasury, which rose from 3.74% at the beginning of the year to a 16-year high of 5.02% on October 23, fell to 4.62%,” said Matt Swerdlow, Senior Director of Capital Services for Ariel Property Advisors. “Commercial real estate investors have adjusted to the higher rate environment, but clients in a position to rate lock will benefit from a Treasury yield that is 40 basis points lower from the high in October.”

Higher rates contributed to lackluster sales in the New York City multifamily market in Q3 2023, particularly for rent stabilized buildings. Dollar volume declined to $1.55 million, down 56% from Q2 2023 and 58% year-over-year, Ariel’s Q3 Multifamily Quarter in Review New York City shows. Manhattan and Brooklyn accounted for over 80% of the City’s dollar volume during the quarter and of those transactions, 90% and 80%, respectively, were for free market properties.

Looking forward, however, a pick-up in New York City multifamily sales is expected for several reasons:

• The FDIC is requesting bids for the Signature Bank portfolio, which includes 2,800 multifamily loans of which 2,200 are secured by rent stabilized buildings. The disposition of these loans should provide investors and lenders with more clarity on pricing. The market has already seen prices for select rent stabilized buildings in New York City fall by 30% compared to 2015 levels and, in some cases, by more than 50%.
• The cost of debt combined with the Supreme Court’s announcement on October 2 that it wouldn’t hear a legal challenge to New York City’s rent stabilization laws may motivate some owners to put their buildings on the market.
• International high net worth clients continue to see New York City as a safe haven and are moving forward with acquisitions following the terrorist attacks in Israel and wars in the Middle East and Ukraine.

Shifts in the Banking Sector

Swerdlow observed that financial institutions are still eager to finance affordable and free market multifamily and industrial properties but are shying away from the office asset class. For example, Ariel recently arranged the following transactions:

• The sale of a newly constructed, luxury 75-unit multifamily property located at 69 East 125th Street in Harlem for $28.2 million, which was financed with a $16.9 million acquisition loan from JPMorgan Chase;
• The sale of a 160,000-square-foot affordable multifamily and commercial property with 111 residential units at 950 Westchester Avenue in the Bronx for $19.1 million, which was financed with a $14 million loan from Flushing Bank; and
• A joint venture for the acquisition of a 65,000-square-foot, 60-unit affordable housing complex in Charlotte, NC, with Fannie Mae through Greystone providing the $5.95 million senior loan on behalf of the sponsors.

The regional lending landscape is undergoing a significant transition, however, and balance sheet lenders are experiencing increased scrutiny stemming from the bank failures in H1 2023. In addition to the failure of Signature Bank, regulators closed First Republic Bank in May.

“Although some lenders today are more cautious, this has created an opportunity for new financial institutions to step in and significantly shift the landscape in New York City and across the country,” Swerdlow said. “We’ve successfully brought clients to new banks who do not have legacy issues on their balance sheet. There’s a common misconception that every bank is closed which is plain not true. We are regularly surprising clients that choose to run a comprehensive process when procuring financing and I would encourage everyone else to do the same.”