09/19/2024
Yesterday the Federal Reserve cut their funds rate by 50 basis points. Although in commercial real estate loans most of the discounts are "baked" into recent loan rates, there is still some room to drop. Chairman Powell in his press conference said that normalization of rates could happen next year and hinted that the days of very cheap money are not to be expected. Many believe that normalization to be around 3%. To put this into some context historically the 5 year commercial loan spread has been between 1.25 and 2.25 points above the 5 year bond. The 5 year today is approximately 3.5%. Today they are on the higher side of that spread.
Chase sent me the following update yesterday end of day:
"Right now, we are looking at rates as low at 5.55%. I can get down to about 5.45% for loans over $5MM. And if you have a sophisticated owner, we can even look at agency financing and you MAY be able to get a rate under 5% but those are for larger deals"
These are numbers we haven't seen in 2 years.
The takeaways today are many:
1) The spread is tightening a little between the 5 year and lender rates.
2) Lender guidelines are a little less restrictive.
3) The prepayment penalties are smaller today than 2 months ago. Lenders feel less threatened that a borrower would refi out of a loan costing them profits.
4) Mood will change as investors see a path to lower cost of ownership.
5) Liquidity will open up as some of the approximate $6 trillion in money market accounts begin looking for better returns.
6) The rates are moving down too slowly and may not see the sub 5% for months.
7) Lower rates will motivate not just Buyers, but Sellers. This will add to supply thus increasing choices and increasing competition for Sellers. This could drive prices down as some will be more motivated to sell right away.
8) The election is 6 weeks away. These will be some very turbulent times.
I'm always available for a chat or meeting to discuss things in greater detail.
Photos are of my 18 unit listing for $3.2M at 343 S Occidental Blvd in LA.
