Sentiments differ depending on which side of the spectrum one is on
The Fed is widely expected to leave the interest rate alone during its meeting this week. That’s of little consolation to those in the commercial real estate industry increasingly worried about capital availability but a good omen for those in the single-family space.
The Altus Group recently surveyed some 200 professionals in the CRE space to gauge their sentiment over current market conditions. Omar Eltorai (pictured left), director of research at Altus Group, noted the heightened anxiety in terms of funding during a telephone interview with Mortgage Professional America.
“Respondents indicated an expectation that there will be an increase in distress as well as a continued pullback by two of the biggest lender sources, which are the bank lenders and securitizations,” Eltorai said. “That’s where the higher interest rate environment for CRE is coming from.”
A contrast in sentiment ahead of Fed meeting
The Fed’s action doesn’t loom as large in the CRE space as it does in the single-family market, he suggested. “It’s not so much a function of what the Fed’s policy is going to be but more so from the fact that you have huge sources of debt capital still highly constrained and the expectation that there will be increased credit risk associated with the asset class as a whole.”
On the other side of the spectrum, there was more palpable relief at the Fed’s likely standdown on rates during its meeting on Tuesday and Wednesday of this week. While the Federal Reserve does not directly set mortgage rates, the body can influence them in adjusting the federal funds rate as well as buying or selling bonds and mortgage-backed securities.
“The data speaks for itself”
Melissa Cohn (pictured right), regional vice president of William Raveis Mortgage, struck a different tone in noting inflation has been steadily coming down with the series of previous rate hikes. The Fed has sought to tamp down inflation to 2%.
In addition to positive inflation data – with the rate currently at around 3.24% compared to 3.70% last month and 7.75% last year – she noted other positive economic data. For one, last week’s jobs report showed unemployment falling to 3.7%.
“The data speaks for itself,” Cohn said. “The Fed is going to react to the data and not to Wall Street’s prediction. And while there may be future rate hikes next year, “there’s going to need to be ongoing economic evidence that that economy is slowing.”
So far, she noted, that scenario hasn’t materialized.
For now, mortgage rates are hovering at around 7.1%, down nearly a full percentage point from mid-October. “We’re probably at an inflection point where rates have come down enough that more buyers are coming back into the marketplace, and prices have certainly not gone up,” Cohn said. “And they’re not going to go up until next year because we’re in the holiday season.”
“There’s very little about it that is static”
On the CRE side, a different mood entirely. A former loan portfolio manager, Eltorai described how the stressful nature of the industry in normal times now has been exacerbated by challenging market conditions.
“Portfolio management is a challenging business,” he said. “It’s a meritocratic industry where good ideas and excellent execution are rewarded but bad ideas and bad execution are effectively punished by the market. It’s something that is highly competitive, and really attracts a lot of curious minds and hard-working individuals. There’s very little about it that is static.”
Heightened anxiety is reflected in the latest survey of CRE professionals, he said: “The market we’re in as well as the operating environment is challenging and possibly even more challenging than before,” Eltorai said.
But this too shall pass, he suggested: “I have faith in the markets; I have faith in the portfolio management industry; I have faith in commercial real estate. Even if there are rough times, it doesn’t mean we haven’t faced them before and won’t get through them.”
The Federal Open Market Committee of the Board of Governors of the Federal Reserve System holds eight regularly scheduled meetings during the year and other meetings as needed.
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