big performer for both GSEs.
Nearly half the units in the
Starlight loan, for instance, were
financed under Freddie Mac’s
Green Advantage program.
Another possible development
that could affect lending going forward is reports that the White
House has plans to limit the federal backstop the GSEs have for
the loans they purchase and secu-ritize. The speculation is that with a
divided Congress unable to put forward reform for the GSEs, the
Administration will seek to do it via its regulatory power. A
clearer sign of the Administration’s intentions will come in
January when it makes its appointment for FHA director when
the current director, Mel Watt, leaves after his five-year term.
DECLINING APPETITE FOR CRE DEBT
Even if the supply of debt remains constant, demand may
fluctuate in the coming year as interest rate increases and a
lower number of loan refinancings take a toll.
Noting a disconcerting trend in its real estate debt survey,
Preqin noted that in June 2018, just 6% of investors said real
estate debt presented the best opportunities over the next
12 months. That’s down significantly from the 26% of respondents who said the same in June 2017.
The declining interest could be a result of concerns about a
market correction. Investor interest in lower-risk core and core-
plus strategies has risen even as 56% have told Preqin they
believe markets are at a peak, indicating that there is a shift
toward perceived “safer” strategies in anticipation of a down-
turn. Tom Carr, Preqin’s head of real estate, says that recently
investors seem to be looking to target equity investments. Still,
he says, “despite waning interest in real estate debt, there is a
record number of real estate debt funds in market seeking
more capital than ever.”
There are other concerns as well. Rising interest rates are
a definite consideration, and the consequences are already
being felt among certain categories, such as multifamily.
For the most part, lending agencies have thus far found ways
to reduce pricing even as interest rates have moved up over the
past year. Cap rates have held firm but given other rising costs,
such as construction and labor, more upticks could be difficult
for developers to pencil in, especially if rents tighten.
Lenders, too, have their concerns. At the recently held
RealShare Apartments, David Schwartz, CEO and chairman at
Waterton Associates, said that it’s becoming more difficult to
get deals done since the higher interest rates are pushing up
borrowing levels and exit caps. Perhaps more to the point, cap-
ital is even flooding into secondary markets, creating substan-
tial competition. “It is challenging to put money out, and groups
like us are going to do fewer deals.”
The Fed, though, has been clear in its intentions: it will con-
tinue to raise the federal funds rate. But at what pace? Heidi
Learner, chief economist at Savills Studley, notes that at its
recent policy meeting, FOMC penciled in an additional 25 bps
of tightening in 2018, another 75 points in 2019, and a further
25 bps in 2020. At the
same time, expecta-
tions for GDP growth
for 2018 and 2019
were revised slightly
higher, from 2.8% to
3.1%, and from 2.4%
to 2.5%, respectively.
But, she wonders,
with no acceleration in
inflation, why do we
need five additional
rate hikes? “It’s clear
that the Fed is more worried about inflation than their forecasts
suggest, particularly against the backdrop of a steadily climb-
ing inflation trajectory,” Learner notes.
She thinks the Federal Reserve might be worried about the
impact of tariffs and fiscal policy changes. “Core PCE inflation
is at seven-year highs, and when asked about the impact from
tariffs on inflation and growth, chairman Powell responded
that ‘we’ve been hearing a rising chorus of concerns from
businesses all over the country about disruption of supply
chains and material cost increases,’” she says.
It may be too soon to see any negative effects in the economic data, Learner acknowledges. “In order to justify the Fed’s
latest forecast, we’ll either need to see more inflation—which
would justify rates being tightened above the Fed’s longer-run
level—or a more rapid slowing in economic growth. In that case,
a further five rate hikes may prove too aggressive.” +
Despite waning interest in CRE
debt, there is a record number of
real estate debt funds in market
seeking more capital than ever.
Tom Carr | Preqin
Heidi Learner | Savills Studley
It’s clear that the Fed is more worried
about inflation than forecasts suggest,
particularly against the backdrop of a
steadily climbing inflation trajectory.