Interest rates

Commercial Real Estate Trends for 2018

By | Commercial Real Estate, Economy, Interest rates

2017 was a great year overall for the commercial real estate industry. Some of the trends will carry over into 2018. Here’s a short list of items to consider going into 2018.

Economic trends

Interest rates are rising. The problem is that only the short-term rates are rising. The longer-term rates are only marginally higher. If the Fed keeps raising the fed funds rate and the 10-year US Treasury doesn’t increase as well, the Fed could end up with an inverted yield curve. This could lead to a slowing economy. At the least, it could lead to some lenders not funding more loans because their net interest margins are shrinking– that alone could potentially slow down the economy. For commercial real estate, increasing rates will affect the spread between cap rates and borrowing rates– the smaller the margin between them the harder it is to find profitable investments.

GDP is growing at a better clip. GDP growth in recent quarters has been around 3%. Some are predicting 4% for 2018. Not everyone shares those forecasts, but one forecast from Goldman Sachs seems to think at 4% the economy will also be more productive– that’s a most welcome word (let’s read that again, productive) that hasn’t been spoken in a while and can replace the disruptive word we have heard so much for the past several years. The Wall Street Journal recently published a great article on how productivity might rebound. Do watch for technology to lead out increased productivity– no, surfing the net doesn’t count! Here’s one article discussing the forecasts of economists from several commercial real estate brokers.

The labor market is tight. Yes, unemployment is the lowest in years and could go lower below 4%. However, that also means wages should be going up and that could lead to inflation. So while everyone is looking at unemployment, it will be important to look at wage growth and inflation. The one thing that helps keep those in check is… here’s that word again, productivity. The more productive the labor market is the less pressure there will be on higher inflation. Of course, if you are developing anything, you are already keenly aware of the shortage of construction labor.

The CMBS market survived the wall of maturities. The CMBS market is looking strong. A great article on the CMBS market is out at Three items to watch here. One, improvements in servicing agreements. This should make CMBS more user-friendly. Two, B-piece buyers are being more selective, more credit sensitive. As a result, CMBS loan candidates really have to meet or exceed underwriting requirements.  Third, the declining delinquency rate on CMBS to continue. The third one, with so much new volume coming into CMBS, delinquency would be expected to come down as new vintages of mortgages are funded and packaged into CMBS pools. This time around, delinquencies may remain lower as lenders and investors have been more conservative in their underwriting and deal selection.

International trade agreements. President Trump has pulled the USA out of some important trade agreements that could have an impact on our economy– its a bit early to tell. So this is a story to follow in 2018. Shipping and ports are the busiest they’ve been in years! So time will tell on this one.

Trends by property type

Multifamily will continue to be a hot market. However, watch out for rising vacancies as an early sign of the market softening. Another important development with the revised tax laws will be affordable housing credits. Keep looking for opportunities to serve the middle class, row houses, transit-oriented developments, and affordable rental units in most areas of the country would be a very welcome development. Finally, check out the chic micro units! These could be a very lucrative sector of multifamily– think luxury hotel rates with leases that last more than one night.

Retail continues to transform itself. As strong retail sales end the holiday season, it will be important to see how retail continues to transform itself with more attractions and creative tenants to draw traffic. Traffic is the key to retail’s success. Tenants are also finding ways to bridge the gap between physical stores and online sales through the omni-channel strategy. It has been said that consumers like to be able to return online purchases in physical stores because of the convenience. And retailers like it because the consumer ends up purchasing three times as much while returning the one item purchased online.

Industrial space has been in high demand with online retailers seeking locations closer to their customers. Expect that to continue, however, watch out for supply. With average construction times at less than 12 months, additional supply can be made available quickly and outstrip demand. So watch the available space in your market and the time it takes to fill up that new space. Look for rents to increase at a slower pace for signs that the market is becoming more balanced.

Office sector seems to be in a sweet spot. Tenants are using new office buildings in the suburbs to attract talent. There are new buildings being constructed in urban areas too. Construction cranes are in the air in most primary and secondary markets. Can demand absorb all the new space? Watch out for short-term oversupply. Watch the trend in the office flex product; it might become more than that as tenants and employees continue to redefine office work.

Rents have been increasing in 2017. Expect that to continue in 2018, unless the economy softens. Watch those vacancy rates in 2018 for any early signs of trouble in 2019!

Finally, look for emerging technologies to improve all aspects of the commercial real estate industry. Technology will provide easier access to data allowing more informed decisions and better service. At least that’s the hope. So embrace it before it embraces you.

We hope 2018 will be a great year for you. Happy Holidays and a prosperous New Year to you from us at Tower Commerical Mortgage!


Salt Lake City is recognized by Freddie Mac as a priority market for multifamily lending!

By | Commercial mortgages, Commercial Real Estate, Interest rates, Multifamily housing

Salt Lake City is now a priority market for Freddie Mac’s Small Balance Multifamily loans for $1-6MM. The agency lender has identified Salt Lake City for top market pricing. They recognize the need and that demand is strong for housing in this market.

Apartment owners of 5- 75 units in Salt Lake City (and given the property, surrounding cities) can get the same highly competitive rates (currently in the high 3%s) as in top markets around the country, like San Francisco, Los Angeles, New York City. Pricing is on a deal-by-deal basis. These loans are 100% non-recourse, have a step-down prepay, cash out option, and 10-year terms with a 30-year amortization. Interest only is available. No lender origination fees and loan closing fees are low. Loan-to-value ratios are as high as 80%.  The process takes less than 35 days from application to close. Apply and lock in a low rate.

As a correspondent lender, I can get you a quote in 24 hours. The items needed are:

  • Current rent roll (preferred with tenant names, start/end dates, and leased area)
  • Prior year and YTD property financials (perfer 2 years plus YTD)

What Commercial Real Estate Trends To Focus On For 2017

By | Bond Market, Commercial Real Estate, Economy, Federal Reserve, Interest rates, Regulation

2017 is almost here! We will be watching the following commercial real estate trends in 2017. These will be important especially if you need financing or are looking for a new property to develop or buy and need financing to do it.


One of the biggest trends to watch will be unemployment– particularly over the next two years. If you followed only unemployment you would have a good feel for where commercial real estate values are headed. Cap rates tend to follow the unemployment rate. So understanding the health of the labor market is an important indicator. It affects how much office space a company needs, the sales volume of a retailer, the industrial space needed for distributors and manufacturers, how many travelers are booking hotel rooms and household formation which drives occupancy and affordability of multifamily. All of this is dependent upon how many people are employed. Closely related unemployment is interest rates.

Interest Rates

What the Fed does will influence interest rates for sure. But unemployment is also what the Fed is watching that influences them to take action too. The Fed’s dual mandate to influence unemployment and control inflation is only done by changing interest rates. The Fed has the ability to change short-term rates by changing their federal funds rate. That’s on the short end of the yield curve. They can also influence the longer end of the market through their HUGE multi-trillion dollar bond portfolio.  It’s the long end that can impact borrowing rates. Raising short-term rates has a direct impact on long-term rates.


Recently interest rates spiked up because of the Fed’s anticipated decision to increase the federal funds rate. But it was also because of market factors such as an increase in commodities and President-elect Trump’s election win and commitment to infrastructure spending.  The bond market has had a big reaction to those two events. It will take time for both increasing commodity prices and any infrastructure spending to impact an increase in prices generally that would lead to inflation. At this time, inflation is still not a concern. But with low unemployment, the largest drivers of inflation is wage growth and with low unemployment, employers have to pay more to get qualified workers. More people working with rising wages will eventually lead to inflation. So we are watching this closely too.

Tax Reform

With President-elect Trump, tax reform is a top priority. The benefit of this is he’s a commercial real estate developer and operator too! So we can expect that whatever actually happens to tax reform, there will be some beneficial change that is positive for commercial real estate. One of the likely benefits is the 1031 exchange will remain. That’s a close item of the tax reform that we will be following, in addition to lower tax rates– another plus for economic growth.

Financial reform

The Dodd-Frank Act, unfortunately, is not going away. But with President-elect Trump, some of its provisions hopefully will. By reducing the regulations that banks are under they will be more nimble to expand their commercial real estate lending in smart ways. Banks do not need regulations to force them to make better loans. Banks are very cognizant of making safe and sound loans. The fewer regulation banks are forced to comply with allows them to make loans that make sense for both them and their borrowers. Yes, there may have been some bad actors, but generally speaking, less banking regulation will allow our economy to function more efficiently, productively and grow at a healthier rate.

To much success in 2017!

Happy new year!


Fed Raised Its Rate And It Is Old News

By | Bond Market, Economy, Federal Reserve, Interest rates

This week the Fed raised their overnight lending rate 25 basis points to .75%. But this is old news. The market basically did it for them with the bond market’s overreaction to the election results with president-elect Trump. So what! The Fed raised their rate 25 basis points. The 10 year US treasury yield has already risen from a July 8th low of 1.38% to 2.6% as of today– that’s 122 basis points. As interests rates rise, bond prices decline and the bond market has been selling off since July– two sides of the same coin. So, did the bond market really see a Trump win back in July? The bond market is very conservative, so did they see a republican win? People have been saying the increase in interest rates generally is a reaction to the Trump win, but that’s not so, because the increase started in July. Or is there an underlying trend that the press hasn’t picked up on yet? Political events and politicians really don’t have a large impact longer term on economic trends unless the effect major policy errors or war. The longer term trends typically are due to larger underlying pressures.

Higher rates attract foreign investment which bids up an already strong dollar which is great for imports, terrible for U.S. exports and foreign investments if you have them. Stocks have moved higher but many anticipate the stable dividend stocks with bond-like qualities which have been so strong for so long will also go the way of other income producing assets– aka bonds. Precious metals have fallen as the dollar has increased– that’s a typical inverse relationship. Commodities have fallen too as they are priced in U.S. dollars and have an inverse pricing relationship– except for the price of oil which has rallied approaching $60. Say what? An oil rally? Some have suggested that oil is the reason why bonds have sold off since July, pushing interest rates higher. Trump’s campaign statements about infrastructure spending and lower taxes to generate growth in the economy has further spiked interest rates.

Back to oil for a minute. Why is oil rising? Is it because of increased world demand or even U.S. demand? Has OPEC changed their stance? Has Saudi Arabia? What is the reason for oil prices bidding up? I do know, just like my car’s engine needs oil to run smoothly, the world economy needs oil to operate as well, so is demand coming from somewhere? Or is oil supply the driving factor? Someone knows, I don’t.

These are the current economic conditions. They are also the market’s expectation of rising interest rates. We have all had 10 years to think about these relationships and the implications of increasing interest rates. We knew this would happen, right? So that is why the Fed’s rate increase is old news. Further and more important, Trump’s win is also probably an overreaction even if the price of oil is an overreaction. Nevertheless, some have discussed that a 10 year U.S. Treasury yield of 3% would be enough to slow down the U.S. economy, which is already having its own troubles trying to grow, let alone the world economy. Is 3% possible? Or is the there finally enough strength in the world economy that a rise in U.S. rates wouldn’t be harmful? I don’t know if 3% is the tipping point.

Interest rates are likely going to come back down a bit in the short term, but probably not to the prior July low. I think the bond market has overreacted to recent events. But I think longer term the trend in rates has begun. Having said that, I am not a forecaster of interest rates, nor do I even try. It’s better to follow the market, is my motto. If you can’t beat them, join them. The Fed’s 2017 forecast is for 3 more rate increases.

Anyway, here’s my reasoning for why I think the interest rate trend is moving higher– at a very slow pace. These trends take time to develop. Trump’s policies will have to make their way through Congress and that takes time as we all know. Commodity prices are low and therefore, finished goods prices are not going to be going higher until producers start paying more for raw commodities. A strong dollar helps import prices remain low, so no inflationary pressure there either. Global inflation isn’t a concern currently either. Inflation is typically a threat at the end of a strong period of growth– something we have not had.

U.S. wage growth while ticking up is also not terrible even with a low unemployment rate. But that never seems to stay low for long and with labor market participation rates at historic lows with baby boomers retiring, employers are left with younger new entrants who have less experience and are more willing to work (forced they may say) for a lower wage. So wage pressures will remain subdued for a while as well. So I think we have 1 or 2 years more before we really start to see rates return to more normal, historical levels with U.S. Treasurys eventually settling in the 4 to 6% range. Nevertheless, the chart below helps me, at least, keep a rising rate increase in perspective. Look how long it has taken rates to drop from the earily 1980s highs. I don’t see an overnight return to high interest rates, do you? I’m not worried.


Another trend that is being discussed is this one on unemployment. As mentioned above, unemployment never stays at low for very long. When it is at low under 5%, guess what happens? An economic recession occurs. This pattern has occurred almost every time since the 1950s and probably longer than that. Why we can’t remain at low unemployment for long is a mistery. I don’t think economists have fully figured it out, but you’ll earn a Nobel prize for sure if you did! If you have, please let me know! But then the optimist in me sees the opportunity when unemployment is high on the other side of the recession. High unemployment is a good sign that the economy is starting to recover. See the chart below. And remember, none of this should be considered investment advice. These are just my observations.

Unemployment chart.

Additional sources for analysis.

Here’s the Fed’s public announcement on their rate decision.

The Wall Street Journal had a good article on the news. (WSJ)


Commercial Mortgage Interest Rates Likely to Remain Low For a Long Time

By | Bond Market, Economy, Federal Reserve, Interest rates

As the Federal Reserve seems set on raising overnight Fed funds rates this December, longer term US Treasury security yields will likely remain low for a longer time. Which means interest rates on commercial mortgages will remain attractive going into 2016. There are several reasons the bond market is reacting this way to movements in short-term interest rates. The bond market is more concerned about overseas economies being weak, the strong US dollar, wages rising ever so slowly, inflation unlikely to reach the Fed’s 2 percent target and commodity prices low especially energy prices.  With the Fed all but certain to raise rates, the yield on the 10-year Treasury note remains flat as it has all year. This is a key bond yield for commercial property owners to watch because residential and commercial mortgages are priced based upon the current yield on the 10-year US Treasury bond.

So regardless what the Fed does to effect short-term interest rates, don’t expect to see longer term rates increasing soon.  See the Wall Street Journal article on this topic.

Fed Tipping Toward December Rate Hike, Minutes Show

By | Bond Market, Economy, Federal Reserve, Financial Markets, Interest rates

The official minutes of the Fed’s October 2015 meeting are available here. The key point making headlines in the press is the following section of the minutes:

“the Committee decided to indicate that, in determining whether it would be appropriate to raise the target range at its next meeting, it would assess both realized and expected progress toward its objectives of maximum employment and 2 percent inflation. Members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve and that inflation will return to the Committee’s 2 percent objective over the medium term. Members saw the updated language as leaving policy options open for the next meeting. However, a couple of members expressed concern that this wording change could be misinterpreted as signaling too strongly the expectation that the target range for the federal funds rate would be increased at the Committee’s next meeting.”

The Wall Street Journal reports that the Fed “minutes stated ‘some’ Fed officials felt in October it was already time to raise rates. ‘Some others’ believed the economy wasn’t ready. The wording meant that minorities on both sides of the Fed’s rate debate are pulling in different directions, with a large center inside the central bank inclined to move.”

But even if they do increase short term rates, a trend towards increasing rates will be slow, “At the same time, the Fed minutes included several new signals that after the Fed does move rates higher, the subsequent path of rate increases is likely to be exceptionally shallow and gradual.” Additionally the Wall Street Journal noted, “Looking ahead, Fed officials see new factors—most notably low productivity growth and an aging population—continuing to put downward pressure on growth. As a result, Fed staff argued the Fed’s target interest rate will rise only gradually as the economy strengthens. Many Fed officials have embraced that view and are trying to telegraph it to blunt the blow to markets of the first rate increase.”

Looking out longer-term,

“Beyond near-term planning on rates, discussions at the Fed turned at the October meeting to an ominous longer-run outlook.

With rates already low and not likely to move up much, the Fed’s target interest rate could return to near zero in the years ahead if the economy is hit by some new shock and the Fed decides to cut rates to cushion the blow.

One such shock might be if the Fed itself raises rates more quickly in the months ahead than the economy can bear.

“They could end up killing things pretty fast,” Mr. Blitz said. The other side of that risk, however, is that the Fed could cause a new bubble if it leaves rates too low. “They don’t have a lot of room here to get it wrong.”

Read the full Wall Street Journal article here.

Fed Keeps December Rate Hike in Play

By | Bond Market, Federal Reserve, Financial Markets, Interest rates

“Federal Reserve officials explicitly said they might raise short-term interest rates in December, pushing back against investors who have bet that the central bank wouldn’t move this year.

The message appeared to have the desired effect. Before the Fed released its policy statement Wednesday, traders in futures markets put about a 1-in-3 probability on a Fed rate increase this year; after the release, that probability rose to almost 1-in-2.

While the Fed kept rates steady after its two-day meeting this week, investors appeared to welcome a vote of confidence in the economy from the central bank. The Dow Jones Industrial Average rose 198.09 points, or 1.1%, to 17779.52.”

via (wsj)

The Fed’s October 2015 press release after the meeting can be read here.

Concern About China’s Sale of U.S. Debt Is Overdone

By | Bond Market, Financial Markets, Interest rates

China has and still does hold a significant share of U.S. sovereign debt. The main concern is that should China sell their US Treasury securities, it would cause U.S. interest rates to increase and be a shock on our domestic economy. These concerns were highlighted recently when China began selling their U.S. Treasury bonds and use the cash to keep their currency cheap against the U.S. dollar. By doing this, China would be able to sell more stuff at lower prices here in the US. As China’s economy has slowed down there has also been downward pressure on its currency.

But China’s sale of U.S. debt has not caused Treasury yields to increase–as so many were anxiously suggesting. Instead others have been buying those very U.S. debt securities that China has been selling. So as China has stepped out, other investors have come in buying U.S. Treasuries and maintaining the demand for U.S. Treasuries and keeping U.S  interest rates low. Another similar instance was when the Federal Reserve began to tapper their quantitative easing program and scaled back their bond buying.

What these two recent financial market events tell us is that the U.S. government bond market is much larger in depth and breath than previously thought. What this market action shows is that the world still finds U.S. debt a safe haven along with the strong U.S. reserve currency. When there is financial distress or world events that provoke fear in foreigner investors, they still come here to the U.S.A with their cash. And when they do, these investors take shelter from the storm by buying U.S. Treasuries. It is also why during the Great Recession, the U.S.A. was one of the few countries that had a strengthening currency or the least bad currency during that time. Thus, you can strike this from your list of things to keep you up at night.

Fed Can Thread the Rate Needle

By | Bond Market, Federal Reserve, Interest rates

There are risks to the Federal Reserve raising rates this week and risks to standing pat

Federal Reserve policy makers are in a tough spot. If they raise rates at their meeting this week, they know they could stir trouble. But if they don’t, they risk forestalling a day of reckoning they believe must come.

One way out: overhaul the framework they have put forward for setting policy.

A month ago, the Fed was on course to tighten policy this week, but financial-market turmoil has altered that call. Where in August 82% of economists surveyed by The Wall Street Journal expected the Fed to raise its target range on rates at its two-day meeting ending Thursday, that number was cut to 46% in this month’s poll.

The divided response from economists is reflective of a Fed that itself is divided. Some members of the central bank’s rate-setting committee would like to delay a rate increase until next year. That isn’t just because of the financial-market environment. It also is because the interrelated effects of a stronger dollar, lower commodity prices and economic weakness overseas look to further chill inflation.

In June, Fed policy makers’ projections centered on an expectation that consumer-price inflation excluding food and energy would be just 1.3% to 1.4% in the fourth quarter from a year earlier. Incoming data suggest they should take that estimate even lower when they update projections this week.

But policy makers also need to raise their projections for economic growth. In June, these centered on an expectation that fourth-quarter gross domestic product would be up 1.8% to 2% on the year, while economists’ current estimates put growth at about 2.4%. Their unemployment rate projections centered on a fourth-quarter average of 5.2% to 5.3%. Last month, the unemployment rate fell to 5.1%.

The steady economy and strengthening job market is one reason some at the Fed would prefer to raise rates now, and they view unsettled financial markets as a poor excuse for not acting. More generally, Fed officials may worry that not moving on rates, but saying that a rate increase is really, really close, may only serve to keep markets unsettled.

In seeking to corral these competing views, Fed Chairwoman Janet Yellen could craft a consensus in the following way: Get it over with and raise rates by a quarter point. But within its postmeeting statement commit to hold off on further increases until inflation is picking up, and underscore that with a move lower in interest-rate projections for the end of next year. In June, these centered on a range of 1.5% to 1.75%.

Such a move would help limit any bad response by markets. And given the backdrop of ultralow inflation, it would probably reflect where policy is heading anyhow.

via (wsj)

Will The Fed Raise Rates at their July 2015 Meeting?

By | Bond Market, Federal Reserve, Interest rates

Federal Reserve officials have a policymaking meeting scheduled in the final week of July, and most analysts expect them to indicate when short-term interest rates could rise from near zero. Fed Chair Janet Yellen told lawmakers this month that the central bank will start lifting rates before the end of this year. While July is considered too soon for an increase in rates, the economy continues to grow moderately after contracting in the first quarter, and employers continue to hire at a solid pace, with inflation still below the 2 percent target. James Bullard, president of the Federal Reserve Bank of St. Louis, has hinted, “I’d see September having more than a 50 percent probability right now.” Private economists also have said that September is likely, but market participants believe policymakers will wait until December.
via (wsj)