Insight By: Miguel Jauregui
As expected, the Federal Reserve meeting on March 15th-16th resulted in a 25 bps increase, giving us a new target of 4.75% to 5.00%.
Although the last Fed meeting alluded to another 25 bps increase at the next meeting on May 3rd, they did not discuss what the terminal rate would be or any planned rate decreases. However, the CME FedWatch Tool is illustrating nearly a 50/50 split on a 25 bps rate increase or no increase at the next meeting and projecting a Fed rate of 4.25% to 4.50% by year-end. Thus, it’s clear that the market is more optimistic than the Fed is willing to state.
On the credit front, as Jerome Powell said, credit will tighten as a result of the recent bank collapses, and we can say with that we have seen this play out in the past two weeks. Community banks make up about 80% of all CRE financing, and in our small to mid-cap world of net lease financing, it’s north of 95%, so the effect lenders with sub-$250B in assets are seeing from deposit flight, tighter liquidity requirements, and increased stress testing are making a direct impact to our financings.
We have seen this through higher floor rates, lower leverage, increased attention to the asset’s location and strength of tenancy, and a heightened focus on the recourse, among other things. However, it’s always case-by-case so it’s important to note this is not across the board.
Looking at a few key data points recently released, annual CPI came in at 6.0% for February, a slight decrease from January’s 6.4%, marking it the eighth consecutive month that the annual rate has been declining. February’s PCE data, the Fed’s favored inflation measure, showed a decline to 5.0% from January, and the core PCE illustrated a decrease to 4.6% year-over-year, matching the lowest annual inflation since October 2021. Furthermore, the last print of the University of Michigan’s Consumer Sentiment report is illustrating a drop for the first time in four months to 63.4.
For more insight on the current lending environment, rate quotes, or recently closed transactions, reach out to Miguel Jauregui: (646) 809-8854 | mjauregui@sabcap.com
