Debt Market Sentiment: November 2024

Fed Watch

With the Federal Open Market Committee (FOMC) meeting just weeks away, the market is closely watching the Federal Reserve’s next moves.

The odds of a December rate cut have fluctuated between 55% and 85% as market participants anticipate key data releases, including PCE inflation data (11/27) and the employment report (12/6). Futures currently suggest a 55% chance of a 25-basis-point cut, but the Federal Reserve may issue more explicit guidance if market expectations diverge from their policy intentions.

Looking ahead to 2025, the market expects a slower pace of rate cuts, with a shallow easing cycle being the most likely outcome. Stay informed with tools like the CME FedWatch to track shifting probabilities in real time.

Life Companies

Life companies are winding down 2024 allocations and preparing for 2025. Quotes range between 5.75% and 6.65% for leverage up to 65%. Spread levels remain around 140-225 basis points, with top-tier pricing in the low 5% range for leverage of 60% or less. Stability in corporate bond spreads is keeping this sector competitive for conservative borrowers.

Banks

The normalization of the yield curve is encouraging banks to increase their appetite for lending. Typical quotes fall within the 6.25%-6.85% range for deals with solid fundamentals, such as consistent collections and a strong tenant mix.

Banks are offering fixed-rate programs for core deals with terms of 3, 5, and 7 years, typically featuring step-down prepayment structures. Floating-rate loans are priced around 275-350 basis points over SOFR, providing flexibility for borrowers in select situations.

Debt Funds

Debt funds are becoming more active as SOFR declines, creating opportunities for clients seeking leverage of 60%-70% loan-to-cost. These funds focus on stabilized debt yields, in-place cash flow, or lease-up deals, particularly in the multifamily and industrial sectors.

Spreads range between 265-425 basis points over SOFR, and on the multifamily side, many funds are leveraging preferred equity positions behind agency senior loans for enhanced returns.

CMBS

The CMBS market continues to favor 10-year terms, with limited pricing flexibility for shorter durations. Rates range from 6.50%-7.50%, depending on loan size, asset quality, property type, and debt yield. Typical terms include fixed rates, up to 75% LTV, and often full-term interest-only (IO) periods.

Agencies

The Federal Housing Finance Agency (FHFA) recently announced increased lending caps for Fannie Mae and Freddie Mac in 2025, raising them to $73 billion each (up from $70 billion in 2024). At least 50% of these allocations must be “mission-driven.”

Agency pricing currently ranges from 5.75%-6.40%, with rate buydown options becoming a popular alternative in this volatile rate environment. Buydowns can reduce rates to 5.45%-5.85%, offering a more attractive financing option for qualified borrowers.

Cap Pricing Trends

Cap costs are at their lowest levels in two years, creating a favorable environment for borrowers. This trend underscores the importance of strategic timing in locking in financing terms.