“We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” Chair Jerome Powell said in his announcement following the April 30-May 1 meeting. “So far this year, the data have not given us that greater confidence. In particular, and as I noted earlier, readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected. We are prepared to maintain the current target range for the federal funds rate for as long as appropriate. We are also prepared to respond to an unexpected weakening in the labor market.”

Motivated Borrowers Adjust to Higher Rates

“In the face of three consecutive months of sticky inflation it was a relief to see the Fed is showing a steady hand by remaining data dependent and staying the course without overreacting,” said Matt Dzbanek, Senior Director in Capital Services.

Dzbanek noted that investors are adjusting to the “higher for longer” monetary policy. Encouragingly, Ariel has seen an uptick in screening activity this year from motivated investors seeking acquisition, refinancing and construction loans primarily in the New York Metropolitan area. The dollar value of loans closed by the Capital Services Group doubled in the first four months of this year compared to the same period in 2023, with transactions rising by 50%.

For borrowers facing loan maturities, Dzbanek said Ariel is taking a holistic approach to identifying the best solution for clients, bringing in advisors from the Capital Services and Investment Sales Groups to analyze deals and present options for both financing or selling. This analytical approach is especially important for New York City assets that will be affected by the new housing policy.

Even in today’s market, a borrower can achieve an optimal financing experience by following several steps. First, by running a process to identify the universe of lenders nationwide (banks, credit unions, agencies, mission driven capital, CMBS lenders) that are eager to make loans. Second, locking in rates at term sheet, when possible, as protection against volatility in the Treasury market. Third, being decisive.

“Keep in mind that there’s not a direct correlation between the federal funds rate and long-term Treasury rate volatility,” Dzbanek said. “Market sentiment and overall economic indicators also play a role.”

For example, the 5-year Treasury peaked at nearly 5% in October, dipped to 3.809% at the end of 2023 and climbed back to 4.725% in April all with the federal funds rate remaining steady at between 5.25% - 5.50%. The 10-year Treasury moved in tandem with the 5-year over the same period.

NYC Housing Plan Will Bring Transparency to the Market

On a local level, the fog has lifted on New York City’s stalled housing policy following the approval of New York’s Fiscal Year 2025 Budget in April.

The policy features tax incentives that could unleash a construction boom for new projects as well as office to residential conversions, and authorizes a slight increase in apartment improvement allowances for rent stabilized apartments that could benefit buildings in the outer boroughs. However, the plan also introduces new regulations governing free market units. A summary of the new housing policy is available here.

“Overall, the plan addresses the housing supply crisis and delivers transparency and clarity to the market which we believe will lead to greater price discovery and more activity, particularly in the development sector,” Dzbanek said.