The Consumer Price Index (CPI) is now at 6.8% year over year, the highest it’s been since 1982, but the markets didn’t react in a way many predicted.
Thirty Capital Analyst Bryan Kern puts this down to the fact that there is so much liquidity in the market.
“The Fed currently holds $5.5 trillion in US government securities,” Bryan explains. “Once they start de-leveraging that balance sheet . . . when that actually happens, we expect the Treasury market to act in a more normal fashion.”
For commercial real estate investors, steady rates are a relief. However, they could be short-lived. Early rate hikes are on the horizon for next year, when the Fed begins to speed up its tapering, with completion anticipated in March 2022.
This Wednesday, the Fed is expected to make an announcement on doubling the pace of tapering, signaling that it will increase interest rates.
Will there be rate volatility before the end of the year?
Bryan and Thirty Capital CEO Rob Finlay discuss what could possibly cause volatility before the end of the year. Bryan speculates not much, while Rob observes that rates appear pegged. Right now, commercial real estate borrowers are looking at around 1.35 to 1.55 on the Ten year in the final weeks of 2021.
Thirty Capital Analyst Jay Saunders says that any shocks before year-end will be shocked to the lower side. If rates do go down, it will be due to a geopolitical issue or something related to COVID.
“The only thing that will drive rates up will be if the Fed comes out more hawkish than everyone expects,” says Jay.
Global concern about inflation
Central banks around the world are all holding meetings this week to discuss interest rates in their respective countries, and there will be decisions across the globe on rates. The outcomes will definitely impact rates in the US.
Short-term rates holding steady
Short-term rates are holding steady, with LIBOR ticking up slightly. Term SOFR is at 5.3, while BSBY is at 6.3.
Three-year swaps moved up over the week by about 8 basis points. “Interestingly enough, they actually gave up some yield on Friday on the back end of those CPI numbers, which is kind of the opposite of what you would expect,” observes Jay.
Can you squeeze in a deal before year-end?
Thirty Capital Analyst Jeff Lee says his team is starting to see the stresses on the lower bound end of their rate estimates – especially for commercial real estate investors who are closing deals in early 2022.
Jeff is originating new deals for as far away as February 2022. He says: “As time goes on, that’s when you really have to start putting that band of 25, 30, 40 basis points of rate stress in your economics.”
Meanwhile, everyone who had structured deals 30, 45, 60 days ago is probably 10% to 15% better than previously.
LIBOR legislation passed in the lower house
In a major step, the US House of Representatives passed its LIBOR bill last week. This federal legislation will address old legacy contracts that don’t have workable LIBOR transition language. Once the bill passes the Senate, it will allow the calculation agents or servicers to force the ARRC’s fallback provisions on any contract that doesn’t have workable fallback provisions.
This week’s commercial real estate tip
A Treasury that yields 7 percent. Listen to Thirty Capital Analyst Jason Kelley for the full details!
Listen to the CRE Capital Markets Report podcast show for more on:
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- Rob and Jeff’s analysis on whether the CMBS market can absorb malls, office properties, given the big loans due next year
- Rob and Jay’s full discussion of the new LIBOR legislation, and SOFR vs LIBOR
- Jason’s update on policy initiatives that could impact commercial real estate, including a bill aimed at cutting down on offshore investing in US real estate.