CRE Debt Market Sentiment: December 2024

Fed Watch

November’s headline and core CPI rose by 0.3%, influencing the Federal Reserve’s strategy on interest rates. Fed Chair Jerome Powell recently emphasized a cautious approach, stating, “We can afford to be a little more cautious as we try to find neutral.”

The odds of a quarter-point rate cut at the next FOMC meeting surged to 99.9% after the latest inflation report, up from 86.1% earlier in the week. With this rate cut effectively priced in, market sentiment suggests the Fed might pause further adjustments early next year. Swaps traders anticipate over 80 basis points of easing in the next 12 months, projecting the Fed Funds terminal rate to hover between 3.5% and 4%.

Track real-time shifts in rate expectations using the CME FedWatch Tool to stay informed.

Life Companies

As we approach year-end, life companies are focusing on 2025 allocations. Current quote rates range from 5.55% to 6.45% for leverage up to 65%. Spreads remain steady between 140-225 basis points, with the best pricing in the low 5% range for leverage below 60%. Stability in corporate bond spreads continues to anchor LifeCo pricing for alternative investments.

Banks

Banks remain active participants in the lending space as the yield curve normalizes. Current quotes are in the range of 6.15%-6.75% for assets with stable cash flows and strong tenant profiles.

Banks offer attractive fixed-rate programs for terms of 3, 5, and 7 years, typically with step-down prepayment structures. Floating-rate loans are priced at 275-350 basis points over SOFR, providing borrowers with flexibility in certain scenarios.

Debt Funds

Debt funds are capitalizing on lower SOFR rates, actively pursuing opportunities in the multifamily and industrial sectors. Borrowers can expect 60%-70% loan-to-cost leverage, with spreads ranging from 265-400 basis points over SOFR.

Many debt funds are also strategically targeting preferred equity positions behind agency senior loans, particularly in multifamily transactions, to maximize returns in the current lending environment.

CMBS

The CMBS market continues to favor 10-year loan terms, while shorter durations like 5- and 7-year loans remain challenging to price. Rates range from 6.50%-7.50%, depending on asset quality, loan size, property type, and debt yield. Typical terms include up to 75% LTV, often with full-term interest-only (IO) options.

While CMBS spreads have shown relative stability in recent weeks, participants are keeping a close eye on both new issue and secondary market trends.

Agencies

Freddie Mac announced a 10-basis-point reduction in spreads this week, reflecting its commitment to competitive pricing.

As of October, Fannie Mae reported $38.5 billion in new business volume (down from $45.7 billion last year), while Freddie Mac recorded $43.7 billion (up from $37.0 billion in 2023). Agency pricing is currently in the range of 5.55%-6.20%, with rate buydowns emerging as an effective solution for borrowers seeking lower costs. With buydowns, rates can drop to as low as 5.25%-5.65%.