CRE Lending Commentary
Residential mortgages are no longer feasible for homebuyers, which paired with inflated home valuations, presses high demand onto rental markets across the country. Multifamily rent growth peaked in Q1 2022 (11.2% YOY). Numbers have since decreased (5.7% YOY in Q3) and are expected to plateau towards a smaller, but more sustainable level of rent growth. One might credit this slowdown in part to an eruption in multifamily development, with more deliveries in Q3 (129,351 units) than any other in recent decades.* This influx of supply has harmed lender confidence in rent growth projections and made them more selective. Overall, increased market uncertainty and higher cost of capital has contributed to lower leverage loans and is forcing borrowers to find creative solutions to transact and fill the missing pieces of their capital stack.
From the Fed
TheFederal Reserve increased interest rates by 0.75 percentage points inNovember’s meeting in a continued effort to curb inflation; Chairman JeromePowell also suggested plans to continue to raise interest rates, albeit insmaller increments, but to higher levels than previously anticipated. This isthe fourth consecutive 0.75-point raise and lifts the central bank’s benchmarkfederal-funds rate to a range between 3.75% and 4%.
A recession warning has been issued by bond-markets as the 2-yearTreasury yield is now more than a half-percentage point higher (4.67%) than the10-year Treasury yield – When short-term yields are higher, traders typicallyproject the central bank will switch to cutting interest rates in the monthsahead which is prompted by economic slowdown or a recession.
A week clear of the November Fed meeting, markets have rallied as investor optimism has built ahead of the midterm elections. Stocks have now shown three straight days of gains, but with no clear indication of who will control the Congress, futures are lagging.
The final two months of the year are historically considered a bullish period for investors; the midterm elections and the policy clarity that follows provides relief in the markets. Still, market gains and sentiment may be limited as implications of Fed policy and Thursday morning’s inflation report will likely have a larger effect on the overall market.