A Comprehensive Analysis of Today’s Capital Markets & Trends
(Part 1)
Written by Ryan Gray, Executive Vice President of Investments & Acquisitions at Carter Funds |
Policymakers on the rate-setting Federal Open Market Committee (FOMC) raised interest rates another quarter point in July 2023.
On Wednesday, July 26, 2023, the Fed voted unanimously to a 25-basis point increase in the targeted fed funds rate, which represents the 11th rate hike since March of 2022. These eleven increases equate to a 500-basis point increase total, driving the targeted rate from 0.25%-0.50% in March of 2022 to 5.25%-5.50% presently. With the elimination of Libor (London Interbank Offered Rate), SOFR (Secured Overnight Funding Rate) has replaced Libor as the short-term benchmark for many floating rate loan structures, which has followed closely with the Fed hikes, rising from <10 bps in February 2022, to 5.33% as of September 15, 2023. This rise in rates has driven short-term borrowing costs and floating interest rates to a range of 7-9% based on indicative investor/lender spreads of 200-350 basis points.
Continued rate hikes are expected to put downward pressure on multifamily property prices.
As a result of this dramatic rise in rates, multifamily investment sales volumes have fallen to their lowest levels since 2009. Data research firm CoStar (CSGP) recently reported that multifamily investment sale volumes fell to $14B in the first quarter of 2023, a 74% decline from the same period in 2022. The drop represents the largest year-over-year decline since falling by 77% percent in the first quarter of 2009.
Multifamily continues to lead as the top commercial real estate asset class in investment volume.
Commercial real estate advisory firm, CBRE, reported that all investment activity in the multifamily sector totaled $24B for the first quarter of 2023, representing the lowest Q1 volume since 2014. Despite the market headwinds, multifamily represented the largest share of all commercial real estate investment volume at 30%.
In addition to multifamily’s strong underlying fundamentals, the sector also benefits from Fannie Mae and Freddie Mac—debt sources that are not available to other asset classes. As the market starts to stabilize, it is anticipated that more investors and lenders will deploy capital in one of the best asset classes for hedging inflation concerns.[1]
Meanwhile, economic indicators remain healthy.
Amidst ongoing challenges, the American economy displays signs of resilience and strength. Consumer confidence trends are reflecting a positive outlook. The job market remains steady and healthy, witnessing an addition of around an average of 235,000+ jobs per month in 2023, while unemployment nears its lowest rate in fifty years. Moreover, Q2 GDP growth accelerated to 2.4%, outperforming the previous quarter’s 2% growth rate. Consumer spending continues to surge, increasing by 1.6% in the last quarter, contributing significantly to the overall GDP growth. Inflation data of late has been moving in the right direction although the Fed’s preferred gauge still has prices rising above the central bank target.
Together, these indicators suggest a promising trajectory for the US economy despite the challenging landscape.
With our team’s robust expertise in investing, commercial real estate management, and multifamily property operations, along with our industry relationships, Carter Funds is well-prepared to navigate current market dynamics. Our strategic approach to acquisitions, coupled with resource optimization, positions us to seize the unique opportunities that lie ahead.
Stay tuned for part 2 of this article in the coming weeks.
[1] https://www.cbre.com/insights/books/us-real-estate-market-outlook-2023/multifamily
