Interest Rate Update

How will the Fed’s recent decision impact commercial mortgages going forward? Are rates going to blow through current levels and stall the recovering commercial real estate market?  The Fed announced they will start tapering their bond program in January by reducing purchasing at a rate of $10B to $75B per month.

This determination to curtail also came with the very important decision to keep the Fed funds rate at the current level, prompting pundits to forecast that increases in short term rates won’t materialize until late 2015 or possibly even 2016. Inflation has continued to remain below the Fed’s target of 2.00%, and until we see inflation pressing those levels, the short term rates should continue to remain low.

Overall we believe that commercial real estate markets will continue to move forward at a very healthy pace. Lenders will absorb a large percentage of the maturing and purchase money loans that will be coming to market during the next 24 months, and we expect them to be competitively priced.

Rates are still at historic lows and we are seeing significant tightening in spreads as a result of better market conditions and competition among lenders. It is likely we could see a movement upward in treasuries as a reaction to the taper, but we believe that the overall rate environment will continue to remain competitive.

Near term outlook over the next 12 months is positive. The majority of commercial lenders, if not all of them, have maintained or increased their allocations for origination in 2014. This approach is right in the face of rising interest rates, and although most feel that higher treasury yields will be ahead of us, most lenders are extremely liquid and are still unable to secure returns on investment capital at levels above what they are achieving in the commercial mortgage or real estate investment space.