The U.S. commercial real estate market, which has been struggling, is now seeing a glimmer of hope as expectations grow for a shift in Federal Reserve policy towards rate cuts. With a wave of debt coming due next year, this news couldn't have come at a better time.
Long-term rates, as indicated by the significant decline in the 10-year Treasury yield since October, were already on a downward trajectory. However, last week, the Federal Reserve surprised the market by signaling a pivot to rate cuts in 2024 during its final policy meeting of the year. Fed Chairman Jerome Powell emphasized the importance of not keeping rates high for too long, leading to a powerful rally in stocks, bonds, and other risk assets.
The sentiment in the market has significantly improved due to these developments. Daniel Lisser, Vice President at Marcus & Millichap Capital Corporation, remarked on the positive change, stating, "People are just in a better mood about everything." Lisser noted that multifamily loans are now being secured at lower rates in the range of 6.5%, compared to around 7% in recent months. For the first time in a while, there is now an expectation of downward movement in rates rather than an upward trend.
The vulnerable state of the commercial real-estate market has caused concern among investors, property owners, and regulators who fear potential ripple effects on the financial system. However, the decline in the benchmark 10-year Treasury rate has helped alleviate some worries. On Monday, it stood at 3.96%, a substantial decrease from its 16-year high of about 5% in October.
Refinancing Opportunities for Borrowers in 2024
According to BofA Global analysts, the recent rally in the commercial mortgage market has increased the chances of borrowers being able to refinance their loans without injecting more equity into their properties. The analysts now forecast that approximately 77% of borrowers with loans coming due in 2024 will be able to take advantage of this opportunity. This is an improvement from their previous forecast of 65% in September, which was based on loans financed by Wall Street's commercial mortgage-backed securities market.
The key factor behind this improved outlook is a downward revision in the estimated weighted average coupon for new loans in 2024. The analysts now expect this figure to be around 6.5%, compared to their earlier estimate of 8%. This adjustment takes into account recent market trends and suggests that there may be more flexibility in rate expectations than initially anticipated.
It's important to note that borrowers are facing a substantial challenge in the form of a more-than-$1 trillion wall of maturing commercial mortgage loans in 2024 and 2025, as reported by the Mortgage Bankers Association. This debt was primarily secured during a decade of historically low interest rates, before the Federal Reserve embarked on a series of rate hikes in 2022, marking its most aggressive campaign in almost four decades.
However, there is some relief on the horizon. The Federal Reserve recently updated its projected path of interest rates, indicating the possibility of three 25-basis-point cuts to its short-term policy rate next year. At present, the rate remains unchanged within a range of 5.25% to 5.5%, which is the highest it has been in 22 years.
Overall, these positive developments have contributed to the optimistic performance of the stock market. On Monday, both the Dow Jones Industrial Average and the S&P 500 index were on track to achieve new record closes, signaling a favorable economic climate.
Keyword tags: commercial mortgage market, refinancing, loans, borrowers, equity, interest rates, Federal Reserve, stock market
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