The US Federal Reserve raised interest rates by 25 basis points and is keeping additional hikes on the table as credit markets and the wider economy try to find equilibrium in the wake of a trio of US bank failures and Credit Suisse’s acquisition by UBS.
Jerome Powell, chair of the US central bank, said during a March 22 conference there is still ample liquidity available in the financial markets following the recent interventions to save or shore up troubled regional banks including Silicon Valley Bank, Signature Bank and others.
Thinking longer term
Powell said the Federal Reserve had floated different rate adjustment scenarios leading up to its March meeting – including a pause – but ultimately took a stance that “some [interest rate] policy firming may be appropriate.” Market uncertainty is such that the recent bank troubles may turn out to have only modest effects on the economy, in which case inflation will continue to be strong, he explained.
“It’s also possible this potential tightening will contribute significant tightening in credit conditions over time, and in principle, that means that monetary policy may have less work to do,” Powell said. “We simply don’t know.”
Henry Stimler, executive managing director at New York-based advisory Newmark, told Real Estate Capital USA while the market had anticipated the 25bps rate hike, commercial real estate professionals were really tuning in for Powell’s commentary.
“The market is reacting to what it believes is an ‘end in sight,’ subtly implied by Powell’s comment that there would be just one more by the end the year – which is good news for lenders because the market needs some stabilizing news,” Stimler said. “So, overall, no great shock and some light hopefully at the end of the tunnel.”
There was an additional case for the 25 basis point increase, said D Scott Lee, co-founder and president of Los Angeles-based advisory Tauro Capital Advisors. Lee told Real Estate Capital USA that a decision of no increase in interest rates would have caused market reaction, adding that he expects no further increases for the next Federal Reserve meeting as well as the two successive meetings.
“There is pressure not to exasperate the regional banking deposit issues, and inflation moderation has been making positive movement,” Lee said. “The market would like to see how this trend proves out.”
Zachary Streit, founder and managing partner at Los Angeles-based capital advisory WAY Capital, told Real Estate Capital USA the move was mostly a result of inflation, which remains above the Fed-preferred level of 2 percent.
“We think the impact to commercial real estate of this relatively small hike alone should not be huge, as the majority of hikes have already occurred and we are optimistic that rates on transitional financings will decline considerably as projected by a big decline in the forward SOFR curve,” he said.
The turmoil in the banking system, a major talking point for commercial real estate lenders, was a key part of Powell’s commentary. “We are committed to learning the lessons from this episode, and to work to prevent events like this from happening again,” Powell said.
The Federal Reserve has been very active over the past two weeks, taking over SVB and Signature, arranging $70 billion of funding via its own coffers and JPMorgan Chase to give First Republic Bank liquidity and subsequently a $30 billion joint rescue plan from a consortium of banks for the troubled regional lender. Against this backdrop, UBS was working to acquire Credit Suisse after the latter Swiss bank encountered its own liquidity crisis abroad.
Chaos seen at SVB, Signature and First Republic Bank has been cause for concern within the commercial real estate debt market. Regional and local banks accounted for 27 percent of all new commercial real estate originations in 2022 compared to the average 17 percent the sector accounted for on average before the pandemic, MSCI Real Assets data showed.
In MSCI’s Capital Trends US Big Picture report published March 22, the New York-based data and analysis company noted the asset-liability mismatches at SVB and Signature may not be repeated at every bank, but it would not be surprising to see new scrutiny of smaller banks in light of these failures.
Powell said the central bank is well aware of the concentrations that regional banks have in commercial real estate. “I really don’t think it is comparable to this,” he noted, commenting on SVB and Signature’s risk being mimicked by the wider field of regional banks. “The banking system is strong, it is sound, it is resilient and it is well-capitalized.”
Stimler noted – parallel to Powell – the regional banking issues experienced earlier this month have caused financial conditions to tighten more than the market indicates.
“By adding this dampening effect, we will see a net-neutral impact on inflation,” Stimler said. “With the market thinking continuous rate hikes are coming to a close, and this is where rates will be for the foreseeable future, we finally have a level. That sense of stability is going to help more transactions will get done.”
Ease on, ease off
Mike Van Konyenburg, president of New York-based real estate investment bank and advisory Eastdil Secured, said in his published market analysis last week that the Federal Reserve’s new lending program to effectively cover all bank deposits for at least year effectively puts the central bank back into the quantitative easing game.
“This is usually good for commercial real estate,” he wrote. “By offering to lend to banks based on the par value of their securities – versus current market value – the Fed will be increasing liquidity into the system and increasing its balance sheet.”
Powell said the central bank understands balance sheet expansion is essentially temporary lending to banks to meet those special liquidity demands created by the recent tensions.
“It’s not intended to directly alter the stance of monetary policy,” he said. “We do believe that it’s working; it’s having its intended effect of bolstering confidence in the banking system, and thereby forestalling what might otherwise have been an abrupt and outsized, tightening in financial conditions.”