At its first meeting of the year, the Federal Reserve voted unanimously to raise the target range for the federal funds rate by 1/4 percentage point to 4.5% to 4.75%. With the latest increase, the Fed has raised interest rates by 4.5% in the last year and continues to significantly reduce the size of its balance sheet. While remaining committed to reducing the inflation rate to 2%, policymakers plan to implement rate increases at a slower pace while assessing the effectiveness of their restrictive monetary policy. Inflation continued to skew steadily downward in December with an annual increase of 6.5%, down from its 9.1% peak in June.
“We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy, particularly housing,” Fed Chair Jerome Powell said. “It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. In light of the cumulative tightening of monetary policy and the lags with which monetary policy affects economic activity and inflation, the Committee decided to raise interest rates by 25 basis points today, continuing the step down from last year’s rapid pace of increases. Shifting to a slower pace will better allow the Committee to assess the economy’s progress toward our goals as we determine the extent of future increases that will be required to attain a sufficiently restrictive stance.”
At the press conference following the announcement, Powell said the economy is in the early stages of disinflation and didn’t believe rate cuts would be appropriate this year. The Fed’s Summary of Economic Projections (SEP) released in December estimated an increase in the median fed funds rate to 5.1% at the end of 2023, 4.1% in 2024 and 3.1% in 2025. Powell said the forecasts will be updated in March.
“Last year, the FOMC raised interest rates at an unprecedented speed and, at the same time, implemented quantitative tightening, so it’s encouraging to see that the Fed plans to pause and gauge whether its policies are successfully lowering inflation before introducing further shocks to the economy,” said Matt Swerdlow, Senior Director in Ariel Property Advisors’ Capital Services Group.
Despite the interest rate hikes, 2022 was a record-breaking year for New York City investment sales with 2,700 transactions valued at $39 billion. Activity in the first half of the year was particularly robust as investors raced to close deals before the anticipated rate hikes took effect and slowed in the second half as the Fed raised interest rates by 350 basis points between June and December.
“The volatility in the market in the latter half of 2022 was challenging for clients who experienced multiple rate hikes while they were in the middle of securing financing to buy a property,” Swerdlow said.
Forecast for 2023
“I’m optimistic about 2023 because investors have more confidence that even if the Fed raises rates, the increases will be more modest and fluctuations will be in an acceptable range,” Swerdlow said. “Improved inflation figures have prompted Treasury rates to fall to levels not seen since September, which is refreshing.”
For example, even with the Fed’s November and December combined 125 basis point increase, Treasuries have come down a very significant 70 basis points over the same period. Borrowers in the market for financing that is directly priced over the Treasuries can rejoice and benefit from the drop.
“There was a day recently where we rate locked several deals as the Treasuries gave way for a nearly 40 basis point reprieve which allowed our clients to earn out some more interest only periods at a better rate.”
How Can Borrowers Prepare
Swerdlow continued, “At the end of the day, interest rates are a tool and what matters is being able to calculate a satisfactory rate of return on an investment. To ensure there are no rate surprises, we partner with lenders that lock in rates early, which can lead to a significant discount in monthly costs and run a full transparent process with weekly client calls.”
Multifamily Loan Programs
|Portfolio Lenders (Max 75% LTV)|
|Agency Lenders (Max 80% LTV)|
|5 Year||5.00% - 5.50%|
|7 Year||5.00% - 5.75%|
|10 Year||4.75% - 6.00%|
Commercial Loan Programs
|5 Year - Bank||5.75% - 6.50%|
|7 Year - Bank||6.00% - 6.75%|
|10 Year - CMBS||5.90% - 6.60%|
*full-term interest only available
Construction / Development / Bridge
|Stabilized / Core||300-450 bps|
|Value Add / Core Plus||450-600 bps|
|Re-Position / Opportunistic||600+ bps|
|5-Year U.S. Treasury||3.43%|
|7-Year U.S. Treasuryy||3.39%|
|10-Year U.S. Treasury||3.35%|
|1- Month LIBOR||4.58%|
|30-Day Avg. SOFR||4.31%|
|1-Month Term SOFR||4.57%|
|Ameribor Unsecured Overnight Rate||4.63%|
|5-Year SOFR Swap||3.50%|
|7-Year SOFR Swap||3.45%|
|10-Year SOFR Swap||3.40%|
Pricing current as of February 02, 2023