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Market Commentary from Cushman & Wakefield
- As expected after a year of strengthening economic data and convincing employment growth, the FOMC voted to raise interest rates 0.25% by increasing the target range for the federal funds rate to 0.50%-0.75%. The Fed also released projections that indicate their intention to increase rates three more times during 2017. It is important to consider that at this time last year the Fed had forecasted four hikes in 2016 and six hikes in 2017. One Month LIBOR is currently 0.77% and projected to increase to 1.33% by the end of 2017. Given that the increase from the Fed was expected and already priced into fixed income markets, there was no immediate impact on interest rates, but interest rates are generally up 10-15 bps from a month ago.
- One of the most discussed topics right now is what will happen to cap rates as interest rates increase. Interest rates are up dramatically since the US election in November, but the consensus of industry professionals is that historically wide cap rate spreads that still exist can dampen the impact on cap rates as there is less perceived risk as a result of improving economic conditions and at least some transparency on the Fed’s goals regarding interest rates.
- 2016 US CMBS Issuance ended the year at approximately $76 billion which is down 25% from 2015. Approximately $112 billion of CMBS loans will come due in 2017. Based on recent projections by Moody’s Investor Service, the payoff rate is projected to be only 50-60%. “Poor underwriting and a decline in cash flow may cause a significant portion of aggressively leveraged legacy loans made in 2007 to face difficulty refinancing,” the ratings firm said. Retail and office loans, which represent ~64% of loans by balance maturing in 2017, are expected to struggle the most as fewer than half are conservatively leveraged with LTVs below 80%. The recent increase in interest rates will further stress the DSCRs for these highly leveraged maturities.
- Cushman & Wakefield recently released their November 2016 Capital Markets Overview and Outlook which provides detailed analysis and commentary on cross border activity, pricing trends, and drivers and momentum by property type. The full report is available here.