With inflation, rising interest rates, and bad performance in the Treasury market, the CRE Finance Council (CREFC) found that overall sentiment among its board of governors took a nosedive for the first quarter of 2022.
The organization started the index in 2017. The current level, a score of 80.5, down from 105.2 in the last quarter of 2021, is the second lowest on record, with only the first quarter of 2020 registering worse. The change was “decidedly negative.”
Although in the previous quarter 65% of the board expected the economy to improve or stay the course, now only 25% hold that view. Three-quarters expect the economy to worsen. Expectations of borrower demand are also lower: “In 4Q 2021, 59% believed there would be more borrower demand for CRE and multifamily debt, with the remainder feeling it would stay the same. In the current survey, only 13% believed there would be greater demand, with 35% believing there would be less demand.”
With 300 companies and 18,000 individuals as members, CREFC is a trade association for the commercial real estate finance industry. The board of governors is a group of nearly 60 industry executives including such areas as balance sheet and securitized lenders, loan and bond investors, mortgage bankers, private equity firms, loan servicers, rating agencies, attorneys, and accountants.
One major concern is not just inflation but the potential for a so-called hard landing as the Federal Reserve tries to guide the economy. “There have been 16 monetary policy tightening cycles in the United States, United Kingdom, and Europe since the late 1970s,” the group notes. “Thirteen of those have ended in recession. Those 13 misses occurred due to either outside shocks to the economy (such as pandemic or war) and/or central banks being too slow or too timid when they did respond and then having to tighten so aggressively as to trigger a recession.”
The Fed has already started to increase its target rate at which banks lend to one another overnight. From a near zero range, the new target is between 0.25% and 0.50%. This affects commercial lending and, as such, the financing costs in CRE.
The 10-year Treasury yield started 2022 at 1.63% and as of Monday, April 18, 2022, was 2.85%, although in real terms that is -0.07% after inflation. As interest rates go up, the values of previous bonds drop. Also, the “Secured Overnight Financing Rate (SOFR), the floating-rate benchmark replacing LIBOR, also saw significant movement with 1-month Term SOFR beginning the year at 0.06% and rising to 0.41% as of April 8.”
One bit of good news is that board members didn’t see liquidity issues on the horizon and said there would be sufficient capital for borrowers to obtain financing.