Fed Announcement Will Encourage New Activity

“Today’s announcement to maintain interest rates at the same level and implement rate cuts in 2024, are welcome developments for clients planning acquisitions and refinancings in the new year,” Matt Dzbanek, Senior Director of Capital Services for Ariel Property Advisors, observed. “Our team maintains a network of depository institutions, agency lenders, and bridge lenders, including lenders from out of state, that are active in the New York City market and will be eager to accommodate the new transactions.”

Dzbanek noted that mortgages linked to short-term Treasuries have already started declining in recent weeks. For example, five-year Treasury notes dropped from a peak of nearly 5% in mid-October to 3.85% following the Fed’s announcement.

Opportunity in Distressed Assets

In 2023, high interest rates depressed the investment sales market, rocked the banking sector and caused distress in commercial real estate assets, especially among rent stabilized and office properties. However, investors are anticipating that the disposition of the Signature Portfolio and upcoming mortgage maturities will lead to new opportunities.

“As distressed assets move through the market in 2024, there will be lenders available to make loans at the appropriate basis for cash flow positive properties.” Dzbanek said. “While the capital to finance a deal may be more expensive today, as interest rates fall, incomes will rise, and the value of these buildings will increase.”

Rent stabilized buildings this year have been trading at 30% to 40% below their purchase price in 2014, 2015 and 2016. The combination of lower values and higher interest rates will require owners with mortgage maturities to inject fresh equity into buildings if they choose to refinance or, if that isn’t an option, sell them. Owners without maturing loans and adequate cash flow can sit tight while rates continue to fall.

More Financing Options Available for Select Asset Classes

For free market and affordable properties that are outpacing inflation, there will be a multitude of financing options available next year, Dzbanek said.

The lack of new housing supply in New York City has made free market multifamily buildings particularly attractive. Apartment rents in the City rose 6.2% year-over-year, the highest in the nation, according to the Matrix National Multifamily Report for November. In contrast, in Sun Belt markets where robust multifamily development has taken place in recent years, rents declined year-over-year.

Also, buildings with retail located within New York City’s residential neighborhoods are performing exceptionally well because they cater to residents working from home who no longer need to commute to a business district every day.

Consequently, with the Fed’s tighter monetary policy at or near its peak, inflation trending downward and economic data positive, we anticipate transaction activity and financing opportunities to improve in 2024.