Fed Watch: Key Takeaways
Last Friday’s job report brought unexpected news: only 114,000 net new non-farm payroll additions, far below the anticipated 175,000. Unemployment also ticked up to 4.3%. This data triggered an overreaction in the market, with fears of a potential “hard landing” leading some economists, like Wharton’s Jeremy Siegel, to call for an emergency 75bps rate cut. Despite initial market turbulence, with the 10-year Treasury yield dipping to 3.67%, the release of stronger-than-expected ISM data helped stabilize the situation.
Looking ahead, the Fed is expected to cut the federal funds rate by 25-50bps at the September meeting, with futures markets currently showing a 100% chance of at least a 25bps cut and a 72% chance of a 50bps reduction. Keep an eye on the CME FedWatch Tool for real-time updates on rate cut odds.
Life Companies: Stability Amid Volatility
Life companies are quoting rates between 5.30% and 5.90% for leverage at 65% or less. However, with Treasury volatility, these rates can vary significantly due to fluctuating rate floors. Spreads for most deals are hovering around 150-225bps, with the best pricing available for 60% leverage or less. For value-add deals, some life companies are pushing debt yields and in-place coverages below 1.20x, though most are sticking to a 1.25x DSCR for core and core-plus properties. Currently, we’re closing two multifamily loans with life companies that have outperformed the agencies.
Banks: Conservative But Steady
Banks are adopting a more cautious approach, focusing heavily on stress testing, Fed audits, and proactive asset management. Despite this, we’re seeing quotes in the 5.85-6.30% range for deals with strong collections and tenant mixes. Fixed-rate programs for core deals offer 3, 5, and 7-year terms with step-down prepayment options. Floating rates are around 275-350bps + SOFR. LTV targets have generally been reduced by 5-10%, with deposits and existing relationships playing a crucial role in securing favorable terms.
Debt Funds: Eyeing Opportunities
Debt funds are becoming more active, with leverage typically around 60-70% loan-to-cost. They’re focusing primarily on stabilized debt yields and in-place cash flow or lease-up deals, particularly in the multifamily and industrial sectors. Spreads are ranging between 265-425bps over SOFR. In the multifamily space, there’s growing interest in preferred equity positions behind agency senior loans.
CMBS: Preference for Long-Term Stability
CMBS lenders are favoring 10-year terms, as 5- and 7-year options are more challenging to price. Despite market volatility, CMBS spreads have remained relatively stable, with rates ranging from 6.30-7.30% depending on loan size, property quality, and debt yield. Terms typically include 5- to 10-year fixed-rate loans, up to 75% LTV, and often full-term IO.
Agencies: A Vital Source of Liquidity
In the last week alone, Freddie Mac secured $3 billion and Fannie Mae $1.1 billion in new loans. Unlike many lenders who are hesitant to lock rates during volatile periods, agencies can move quickly, providing much-needed liquidity. Average note rates for agencies are currently inside 5.5%, with some deals locking in sub-5% rates. Amortization loans are still available up to 70% LTV with mission-focused lending, offering competitive pricing in the mid-100s spread.
Overall, agency pricing is around 5.30-5.70%, with rate buydowns becoming an increasingly attractive option for borrowers, potentially lowering rates to 4.95-5.40%.
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