There is consensus among both lenders and investors that the US Federal Reserve will continue to pursue its hawkish inflation strategy in 2023. But there is hope future rate rises will be more in line with the 50 basis-point increase seen last December, rather than the spate of 75bps hikes that occurred through the middle of the year.
The magnitude of future rate increases will be a key topic throughout 2023, particularly with a sentiment that future rate hikes could follow the pattern seen at the last Federal Open Market Committee meeting in December. At that time, the US central bank raised rates by 50bps, for a federal funds target of between 4.25 and 4.50 percent.
“We’re waiting and watching. We all know the direction, [but it is] just a matter [of] the magnitude,” says Alan Todd, head of US commercial mortgage-backed securities research at Bank of America. “The extent to which concerns [of commercial mortgage delinquencies] are higher also depends on what kind of economic environment we’re facing.”
Indraneel Karlekar, global head of research and portfolio strategies at Principal Asset Management, believes it could be six to nine months before the commercial real estate market has more clarity on the direction of the Federal Reserve – and the investment and lending markets unlock.
Mid-year reboot
The firm believes the main theme of 2023 will be investing through turbulence, with Karlekar noting it will be critical for investors to be able to separate signals from noise.
“The two signals that will matter the most to investors in 2023 are inflation and how inflation drives central bank action,” Karlekar says. “Those will, in turn, determine your cost of debt and the pace of economic growth, and ultimately will have a huge impact on how investors step back into the transaction market.”
Lenders in the coming year will be working with refreshed targets and parameters, with Karlekar noting much of the focus could be on lending in the core and light value-add bridge space. “Many lenders are cautious about values but are also constrained in a risk-based capital environment, which will put a little bit of a lid on their exposure to commercial real estate. I think the mezzanine space will remain quite busy in 2023 particularly in transactions where the senior lenders won’t be able to step up beyond that 50 to 55 percent leverage level,” says Karlekar.
Marc Norman, associate dean of NYU School of Professional Studies’ Schack Institute, says an important consideration for properties with near-term debt maturities to find refinancing will be the amount of near-term lease maturities it has. Building capital stacks will be very different for different sponsors in the coming year, Norman says. Some sponsors appear to have ready access to equity and debt capital while others will struggle.
Health indicator
“If the debt financing is coming due in addition to leases coming up, it will affect people differently,” Norman adds. “The way we look at lease expirations could change, and they could become an interesting indicator of the health of the market.”
Boston-based Kingbird Investment Management, the real estate arm of the 100-year-old Grupo Ferré Rangel family office, is starting to see the opportunity to provide growth capital to operators who need to fill in gaps in the capital stack. But these opportunities to provide equity, preferred equity and even potentially mezzanine debt are likely to unfold slowly. “We are starting to see glimmers of mispriced risk. And anytime there is market dislocation, it’s a great time to invest,” says Ken Munkacy, senior managing director. “Where the capital needs are more pronounced, there is uncertainty about the value stream in which you’re invested. There won’t be a lot of trades done at this juncture.”
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