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Ongoing Fed Rate Hikes Cause Little CRE Funding Change
To the surprise of absolutely no one, the Federal Reserve continued its attempts to slow inflation down, increasing the Effective Federal Funds Rate (EFFR) by quarter-point to a 4.5%-4.75% range. The increase was less than the five previous consecutive rate increases. And two experts told Connect CRE that the Feb. 1 raise will likely have little impact continued on securing financing for commercial real estate deals.
“It’s already difficult to secure financing,” observed Robert P. Hernandez, managing director, debt & equity with Northmarq. “I don’t think this increase will have much more of an impact. Platforms providing debt and equity have already pulled back.”
Still, projects continue to be impacted with the ongoing rate hikes. “Right now, transaction activity is light, due to the cost of capital, and the recent increase won’t help with that slowdown,” said Dennis Malloy, specialty lender, commercial loan originations, with Alliant Credit Union. He noted that non-distressed buyers and sellers will get back into buying and selling as volatility decreases and the pace of Fed increases moderates.
“Rate increases mean that cap rates don’t make sense to buyers,” he added. “And sellers aren’t willing to come down to where buyers want to be, unless they’re in a position of need.”
Another issue is that the market has continued factoring expected increases in prices. Hernandez said that short-term floating-rate debt will be more impacted. “The long-term bond markets have already priced it in, so I don’t see the cost of longer-term, fixed-rate debt increasing,” he said. Additionally, deals that come with a strong cash flow can secure financing, Malloy pointed out. “Fannie and Freddie are still lending, and there are banks and credit unions in the market for deals with good fundamentals.”
Both Hernandez and Malloy said that the office sector will be the most challenged by the ongoing EFFR increases. “Office deals coming up for refinancing will mostly likely not be as well-occupied, and there may be issues with their current loan amounts,” Hernandez observed. “This could require equity to resolve.”
Malloy agreed, adding that the rate increase is putting another challenge in the way of both office and retail product. “Upcoming maturities within these asset classes will be impacted because there are less levers to pull to generate demand for these property types,” he went on to say. “This means distress might increase.”
- ◦Development
- ◦Financing
- ◦Economy
