Debt Markets Get Some Much-Needed Momentum

The debt markets are still in full-phase digestion mode, although it’s clear the financial markets and CRE debt markets are in a better place today than they were compared to even 30 days ago, according to Cushman & Wakefield’s Global Head of Investor Insights, Abby Corbett.

Speaking on a recent news analysis video by her firm, along with providing analysis, Corbett said that a lot of the improvement can be credited to the Fed’s dovish shift in messaging back in December.

“We’ve also seen a noteworthy contraction in CMBS debt spreads, which has helped create some much-needed momentum and greater diversity in debt sources,” she said.

“This modest tightening in both base rates and in CRE credit spreads has provided market participants with marginally better debt conditions and has helped grease-the-wheels of activity.

She said investors are utilizing shorter- to medium-term fixed rate debt structures (i.e., three- and five-year terms) with the intention to refinance in a few years once the Fed starts its cutting cycle.

That the timing and pace of rate cuts is what is being discussed is a significant improvement over where things were just recently, such as still questioning what the remainder of the hiking cycle would resemble, Corbett said.

Corbett said the Fed’s job is not done, and that it needs more time and incoming data to be sure that inflation is sustainably near-target as Federal Reserve Chair Jerome Powell recently messaged.

“It’s a delicate balancing act considering the backdrop of resilience and stickiness in the labor market,” she said.

The rate stability that should come as monetary policy eases will be a big first step towards allowing the debt and capital markets to gain more momentum throughout 2024, allowing both buyers and lenders to underwrite with some reasonable margin of error, according to Corbett.

“More stabilization in base rates and clarity will also bring some spread compression, which will help to bring costs of capital in marginally.”

Corbett said that it’s important for the CRE debt and capital markets not to ascribe too much emphasis on the Fed’s pivot.

“The cost of capital will remain structurally higher, and acceptance on this point will bring significantly more alignment between sellers and buyers,” she said.

“The cutting cycle will help debt costs come in somewhat, but comparative spreads and yields still need to adjust to this higher cost of capital paradigm: Seller acceptance of this point will be the key toward allowing a more fluid marketplace to take shape in 2024.”

Despite the headwind in structurally higher cost of capital, Corbett said fundamentals outside of office are surprisingly strong.

“We’re facing a situation where we have resilient and robust fundamentals alongside constrained debt market liquidity (where there is significant pressure on capital stacks and deal viability).

“The more that lenders start loosening up conditions and sellers grow conditioned to the fact that we are in a structurally higher cost of capital environment, the more that the bid-ask spread will narrow, allowing new deals to pencil at prevailing debt costs.”