Thirty Capital Analyst Bryan Kern says: “All of our predictions for 2021 were close – we missed it by about two or three days.”

But is 1.80 now the floor, or will we see higher than that? Bryan thinks the floor is in the 1.70 range, with some movement up and down, depending on the news. Generally, he says, commercial real estate investors can expect to see rates heading higher. 

Short-term rate predictions for 2022

In this episode Analyst, Jay Saunders gives an in-depth explanation of what’s happening with short-term rates and the SOFR curve. Briefly, on the short-term rate front, the curve actually steepened a little bit last year. Jay explains that this will continue in 2022. 

Of interest, he adds, is that on the forwards on the SOFR curve there is not a reset anywhere going out for 50 years above 2%. Analyst Jason Kelley agrees, saying that he doesn’t see short-term rates going over 2% at any time in the future. 

Long-term outlook for inflation

Jay says that he and many others aren’t convinced that the economy is in a long-term inflationary environment. Despite what’s happening now – largely due to the pandemic – the long-term fundamentals aren’t going to change.

“I think that some of the inflationary pressures are starting to ease a little bit. I don’t think you’re going to continue to see it accelerate,” comments Jay.

Rate volatility a ‘big deal’

Even so, Thirty Capital CEO Rob Finlay points out that any kind of rate spikes will be tough for investors. For example, a 25-basis point increase on an investor’s borrowing will crush a deal. Rob asks his team if rates will trade within a band of around 1.70, or will there be an increase to 2.25, with rates then coming back down?

Bryan believes rates will generally be range-bound, with occasional – but not crazy – volatility week over week, and there won’t be a repeat of the market’s last two weeks.

The Fed needs to be cautious

Jason says the Fed needs to be cautious. “There are loads of articles out there calling for Fed rate increases this year, but I think the Fed is going to realize that if they crank up rates too much, they’re going to tank real estate and the stock market.

“I think they’re going to soften a bit,” Jason continues. “I wouldn’t be surprised if we get three increases in 2022, but I don’t think there’s four behind that in 2023.”

Jason reminds listeners that even when the Fed tells the market what it’s going to do, it doesn’t always end up doing it. 

Complexity in the CRE market

Rob and his team discuss the current level of complexity in the CRE market. The question a lot of investors face is should they be looking at long-term fixed rates or floating rates. This depends on an investor’s average hold period. Regardless, the numbers need analyzing because they are very important. 

Listen to the episode for the full coverage of the start of the year and what the team predicts for 2022!

Analyst Bryan Kern says that anxiety around the Omicron variant sparked panic buying, hence no increase in rates after the Fed statement. 

Worries over potential shutdowns, struggling economy

Concerns about potential shutdowns are also playing a role, with people asking what the Fed will do if the economy really starts to struggle. With inflation being high, experts are wondering if the government will start piping more money back into the economy. 

“There’s definitely a lot of uncertainty right now,” says Bryan. 

The Fed is in a tough spot and COVID-19 has pretty well been in control of the economy for quite some time now. The Ten-year is probably looking at around a high of 1.75, with a continued flattening of the yield curve.

What’s the impact on commercial real estate investors?

For commercial real estate investors, Rob points at the craziness with SOFR, BSBY, and long-term bonds. Lots of folks are still trying to figure out where they are going, and how to structure their assets and liabilities. 

Explains Analyst Jay Saunders: “There’s a tradeoff between the simplicity of a term-SOFA rate versus the liquidity in a daily, simple average. 

“But certainly, from what we’re hearing, most folks that had LIBOR . . . most are going to a one-month term SOFR.”

Rob expects the market to really make some wild swings because everyone is trying to figure out what to do and doesn’t want to be the first one out the gate. 

“There was an article recently in Commercial Mortgage Alert, which talked about how difficult it’s going to be for a lot of these short-term lenders to all come to a consensus within the next year, within a very short period of time,” he adds. 

The year of the COVID trade keeps rates low

It’s been the year of the COVID trade, says Analyst Jeff Lee of 2021. “Everyone who’s kicked the can has another opportunity right now with Omicron coming back.

“If you look back at where the Ten-year was in late spring and in the summer, when Delta was popping up, rates were pretty high. And then we hung in for a little bit until we popped back up to that 1.71, 1.75. So, everyone has a second chance right now.”

Jeff notes that there are still a lot of people on the sidelines saying ‘I waited and benefited. Why not wait some more?’.

“But you can’t wait forever at this point,” Jeff adds. He is still super busy with deals closing before the end of the year.

Holding off for a deal is ‘just playing with fire’

As well, a lot of commercial real estate investors are rationalizing for next year. “But the longer you wait, it’s just not going to be there,” warns Jeff.

Anyone who’s holding off for a better deal is “just playing with fire”, adds Rob. “Get your deals done if you can!”

Analyst Jason Kelley gives a full update on policy and notes that President Biden’s agenda might be dead, given what happened in the Senate last week. 

Listen to the full episode for all the discussion and analysis!

“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:

• 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.

Thirty Capital CEO Rob Finlay points out the diverse forces tearing at the economy – Omicron and inflation, noting this makes it especially tough for policy makers. “High inflation and some really crazy rates” could happen, points out Rob, comparing it to Paul Volcker’s time as Chair of The Fed in the late 1970s.

Very real expectation of quick taper and rate increases

With a very real expectation of a quick taper and quick rate increases, three-year shorter-term swaps moved up last week, contrary to long-term rates. The yield curve is flattening. 

Senior Analyst Jay Saunders observes: “Interestingly enough, the Fed Fund futures don’t show a tremendous increase or pull forward in the Fed movement. The first Fed rate hike is being priced in around June of 2022. The December Futures show two-plus rate hikes in 2022. So it hasn’t changed a ton.”

But will rates increase?

However, Jay believes that rates may not necessarily increase. He says that the market always acts aggressively when there is a hint of an increase, with something coming along to keep rates down. Most recently, this has been the Omicron variant. The market has its own way of demanding policy changes, which of course don’t always happen.

How flattening of the curve affects CRE borrowers

For some commercial real estate borrowers, there could be tough questions ahead. Should you borrow short-term or long-term. And how does a flatter curve impact you?

Explains Jay: “Long-term rates are coming down, short-term rates will come up. The economics of floating-rate transactions, particularly if you’re hedging buying a cap or something of that nature – which has gotten significantly more expensive – the economics might not look as good as the longer-term CMBS-type structure.”

CRE borrowers ‘stomaching’ a longer term to maturity

For 2021 to date, with a CMBS product, Senior Analyst Jeff Lee has looked at average coupons of 4.75 with a weighted average maturity of roughly May or June of 2024. For Freddie Mac, we’re looking at 4.04 coupons, and a little bit shorter term to maturity at March of 24.

Jeff says that the interesting thing is that looking back through October to November, Thirty Capital has pushed out some of those terms because people are trying to be more opportunistic. He has seen those terms bump-out over the last couple of months, with a CMBS average coupon of 4.65.

He says: “We’re down 10 bps, but we’re pushing the maturity range out to six or seven months. So people are stomaching a longer term to maturity. But they’re offsetting that with some lower coupons. So you’re probably averaging out to a 10, 12, or 15 percent exit cost.”

Listen to all the details, including market analysis and economic updates on this week’s episode. And follow Rob on Twitter for regular news and insights. 

This week’s employment numbers and the next round of inflation numbers are guaranteed to rattle the markets before Christmas.

Treasury’s “crazy” moments

Thirty Capital CEO Rob Finlay describes the Treasury’s “crazy moment” right before Thanksgiving. Earlier, President Joe Biden re-appointed Jerome Powell as Fed Chair, and the economy posted relatively strong data.

However, all this was wiped out with bad news that Omicron is classed as a COVID variant of concern – and is spreading. The Treasury reacted with a drop of 16 bps, and the week finished at about 1.48.

By Monday morning things were starting to normalize, with a return to around 1.56. 

Now could be an expensive time to be underwriting deals!

The Thirty Capital team still predicts a 20-point range for the Treasury, between 1.50 and 1.70 up until the end of 2021.

Some market analysts even predict a low of 1.30. Regardless, Rob points out that commercial real estate professionals have about a 20 basis point swing either way – making it an expensive time to be underwriting deals.

Confusion and questions as LIBOR nears an end

Senior Analyst Jay Saunders notes a slight increase in short-term rates as LIBOR nears its end. One-month LIBOR hit 10 basis points. BSBY is up a touch at 6.5. One-month term SOFR is at about 5.2. 

The caps market is volatile, notes Jay, who gives a full review of all short-term rates in the episode.

The end of LIBOR – set for Dec. 31 – is bringing up a lot of questions from Thirty Capital clients, with commercial real estate investors wondering what their index will be a year from now. If you have questions, contact the team soon. 

Who will lead the next generation index? BSBY? SOFR?

A listener asks which index is evolving in the next generation index. Jay says it’s definitely going to be SOFR. Even so, BSBY hasn’t gone away, but uptake is slowing.

Fall in consumer confidence set to impact rates

Consumer confidence is taking a hit, says Senior Analyst Jason Kelley. President Biden’s approval ratings are falling. And while this hasn’t fed directly into rates yet, there’s a very real chance it will soon. 

Adding to market volatility is a big week on The Hill, with heated debate and questions hanging over what actually gets done by the end of the year. 

The Thirty Capital Team explores the impact of volatility on year-end deals, and how the team is working to support borrowers right now. 

Listen to the full episode for all commercial real estate investment and economic news.

And follow Rob on Twitter for daily updates!