“We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Fed Chair Powell said. “But the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. The economic outlook is uncertain, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.”

Legacy of Restrictive Monetary Policy

The Fed’s “higher for longer” interest rate policy had a chilling effect on New York City’s commercial real estate market in 2023, contributing to a sharp 40% year-over-year drop in investment sales dollar volume to $22.1 billion and a 29% decline in transactions to 1,904, the lowest in the past decade excluding 2020, said Ben Schlegel, Director in Capital Services at Ariel Property Advisors.

“While we anticipate that the worst is behind us, we recognize that we are still in uncharted waters in terms of the depth of market distress,” Schlegel said. For example, New York Community Bank, which purchased assets and liabilities from the failed Signature Bank last year, unexpectedly announced a net loss of $252 million in the fourth quarter compared to net income of $207 million for the three months ended September 30, 2023. Additionally, weakness in the office sector, potential repricing risk in the multifamily portfolio and a rise in classified assets has prompted the bank to increase its loan loss reserves.

Renewed Confidence in the Market

New lenders are entering the New York City market, however, and Schlegel said he is seeing more competitive quotes from financial institutions, which is in stark contrast to their appetite following the failure of Signature Bank and 11 interest rate hikes between March 2022 and July 2023.

“Last year, no one knew what kind of year 2023 was going to be, where rates were going and whether the country was going to end up in a recession,” Schlegel said. “Now, with GDP at 3.1%, inflation falling, Treasury rates moderating and the Fed indicating that there may be rate cuts this year, I'm seeing a lot more confidence today from clients and a greater willingness to pull the trigger because they believe market conditions have improved.”

Financing activity has picked up as a result. In recent weeks, Ariel’s Capital Services team has arranged financing for a number of transactions including a $23.4 million value-add acquisition loan for an 82-unit multifamily on the Upper West Side; a $6 million cash out refinance loan for a Brooklyn portfolio comprised of four multifamily/mixed-use buildings with 22 residential and five commercial units; a $5.5 million cash out refinance loan for Guadalupe Plaza, an 87,000-square-foot grocery-anchored shopping center in Albuquerque, NM; and a robust pipeline.

Schlegel noted that there has been a shift in sentiment and banks are now offering construction and bridge lending for multifamily development, believing that market conditions will be even better in three years when the projects come online. Surprisingly, rents are declining in other cities because of overbuilding but the housing shortage in New York City is guaranteeing that rents will stay elevated here. Relative to the rest of the country, the condo market also has remained resilient despite higher mortgage rates because not enough units are getting built.

“I had one lender call me last week and tell me that they are looking to put out $250 million this year for ground-up residential development,” he said. “They think this is going to be a really big year for them and they are stepping up and pricing deals to win business.”

With multiple rate cuts by the Fed expected some time this year and short-term Treasury rates already declining, Schlegel said he’s seeing more willingness from borrowers to take on floating rate debt due to the flexibility it provides for value-add strategies. Floating rates average 50 to 100 basis points below fixed rate debt.

What to Expect this Year

Mortgage maturities are expected to drive much of the activity this year as owners decide whether to refinance or sell. While it’s too soon to uncork the champagne, investors and lenders are feeling more confident about the market because of possible rate cuts and other positive economic indicators, leading the Capital Services team to be optimistic that 2024 will be a more transactional year.