Federal Reserve stirs hope of less carnage in commercial real estate in 2024

Hopes for a Federal Reserve pivot to rate cuts have given the battered U.S. commercial real-estate market a shot in the arm ahead of a wave of debt coming due next year.

Long-term rates, evidenced by a sharp easing of the 10-year Treasury yield since October, were on a path lower before the Fed last week signaled a pivot to rate cuts in 2024.

At the central bank’s final policy meeting of the year, Fed Chairman Jerome Powell said the central bank didn’t want to make the mistake of keeping rates high for too long, a surprise that helped fuel a powerful rally in stocks, bonds and other risk assets.

“People are just in a better mood about everything,” said Daniel Lisser, vice president at Marcus & Millichap Capital Corporation, in a phone call Monday with MarketWatch.

“The tone has gotten much better with the roughly 100-basis-point drop in the 10-year Treasury yield,” Lisser said, while noting that recent multifamily loans have been getting done at rates in the 6.5% range, down from around 7% in recent months.

“For the first time in a year or so, the expectation seems to be more of a downward move in rates than upward,” Lisser said.

A wobbling commercial real-estate market has been a big concern for investors, property owners and regulators worried about potential ripple effects in the financial system.

See: Commercial real estate a top threat to financial system in 2024, U.S. regulators say

The falling benchmark 10-year Treasury
rate, used to finance much of the U.S. economy, has helped ease some concerns. It was pegged at 3.955% on Monday, after touching a 16-year high of about 5% in October.

The rally has BofA Global analysts forecasting that about 77% of borrowers, by loan count, with loans coming due in 2024 would be able to refinance without injecting more equity into properties. That’s up from their roughly 65% forecast in September, when looking at loans financed by Wall Street’s commercial mortgage-backed securities market.

The improved outlook hinged on a “best guess” of a 6.5% weighted average coupon for new loans in 2024, down from a prior estimate of 8%.

The BofA Global team, led by Alan Todd, said in a Friday client note that recent weeks “have taught us that there may be more ‘wiggle room’ in rate expectations than many — ourselves included — had initially anticipated.”

Borrowers face a more-than-$1 trillion wall of maturing commercial mortgage loans in 2024 and 2025, according to the Mortgage Bankers Association.

Much of that debt was secured in the past decade of ultralow rates, before the Fed in 2022 began its most aggressive campaign of rate hikes in nearly 40 years.

The central bank in December updated its “dot plot” for its expected path of interest rates, signaling potentially three 25-basis-point cuts to its short-term policy rate next year, while opting for now to keep the rate unchanged in a 5.25% to 5.5% range, a 22-year high.

Stocks closed higher Monday, with the Dow Jones Industrial Average
scoring a fourth-straight record close, while the S&P 500 index
ended 1.2% away from logging its first record close in almost two years.

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