Thirty Capital CEO Rob Finlay was asked by a listener the team’s assessment of inflation, and how much of a concern it will be in coming months.
Analyst Jeff Lee notes that the answer listeners are looking for will have many variables, and depend on “where you are in your commercial real estate project or loan life cycle.
“Truthfully, if we had a crystal ball and knew exactly, I don’t think any of us would be on this call . . . we might be on CNBC making some bigger, bolder predictions!”
“It’s a very important question and there’s a big question mark over it,” he adds.
Analyst Jay Saunders points out that Jerome Powell, Chair of The Federal Reserve, has been less dovish about inflation. However, more recently, Powell seems to be leaning towards inflation being transitory.
Despite the concerns about inflation, the market is seeing ten-year swap rates and ten-year treasuries for 1.5 percent.
“Clearly there is a disconnect between anticipated inflation and interest rates. If you’re a borrower and have concerns about inflation you sit on the opposite side of the table from investors. If you really have inflation concerns, you would want to be a fixed rate-borrower,” says Jay.
He reiterates Rob’s position – which is that a borrower should lock up a loan for low and long, and ride out that wave of inflation. If you’re an investor and you’re concerned about inflation, you want to loan out on a floating rate basis.
Inflation may continue for a while
Meanwhile, Analyst Jason Kelley says that he thinks inflation is going to continue on for a while. He notes that the Fed is in a difficult position when it comes to inflation.
“Their mandate is to keep inflation down but to keep the economy on a good path. So If they start raising rates too much, they’ll crash the economy, but if they don’t raise rates enough, inflation is going to keep going rampant. It’ll be very interesting to see where things go in 2022.”
Bank of England holds rates at a record low
Commercial real estate borrowers will be happy to hear that despite the Fed announcement of tapering of $15 billion a month, rates did not go up last week. They fell across the curve.
Jay says a Bank of England announcement last week may have influenced rates in the U.S. On Thursday, the Bank of England said that it would not increase short-term rates, contrary to expectations. And that really started a fall in rates in the U.S.
The Ten-year swap rates closed the week at 1.48, down nine basis points on the previous week. So there’s a bit of a steepening of the curve. Jay also presents LIBOR, BSBY, and term SOFR rates during his segment of the podcast episode.
Rates to increase at a very slow rate?
Jay also explores current economic circumstances and explores whether the market may be entering a period of very slow rate increases, as happened back in 2015.
“The market is taking a more dovish approach to rates; we saw it in the drop across the curve last week,” adds Jay.
Swap rates reached a one-year high last week after starting to come down towards the end of last week.
Economic data was fairly positive last week, with higher-than-expected jobs numbers.
Jay says when you dig into those numbers, there was actually a decline in governmental jobs, which makes the increase in private payroll even more impressive.
Expect choppiness and volatility
Jeff agrees with Jay, adding that commercial real estate borrowers can still expect some volatility in the markets in the coming year.
Jay says that Thirty Capital is seeing tremendous volume in the short-term hedging interest rate caps, driven by some CLO products. He adds that a lot of commercial real estate borrowers are trying to get a product originated this year before LIBOR goes away – giving about two or three more weeks to really get the process started.
CRE investors holding off as long as they can
Jeff says the Thirty Capital office is super busy with calls for year-end and month-end closings. He says the pullback in rates means that some borrowers can take a deep breath and take advantage of an opportunity to lock and proceed.
If you have questions about borrowing or investing, send them to us! We’ll be happy to answer them on an upcoming episode of the podcast!
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