February 14th, 2025
A Quick Recap of Economic Events:
The 10-year UST has stayed stable between 4.40% and 4.60% while macro threats like tariffs, political uncertainty, and inflation continue to pose a risk. The stability in range of the 10 year is likely because the Federal Reserve and markets are aligned on future interest rate cuts. Tariffs remain a major concern, though many see them as leverage in trade talks rather than a trigger for a trade war. If a country resists, it's unclear whether the new administration will follow through on economic pain, even though inflation expectations remain high. Recent CPI data was higher than expected, briefly pushing yields up, but when combined with PPI figures, it suggests inflation may not rise as much as feared. Following a drop in retail sales, the 10-year yield decreased further. While the chances of a rate cut in 2025 are near 100%, the likelihood of a second cut has dropped based on recent data.
The Fed's recent meeting was uneventful, with no changes in policy, despite some hawkish language, which was later toned down by Powell. Labor data was mixed, unemployment decreased slightly, but wages increased at a faster pace.
The Mortgage Bankers Association (MBA) is predicting a significant rise in commercial property lending in 2025, driven by unused capital and maturing loans. Commercial and multifamily mortgage loan originations surged 84% in the fourth quarter compared to the previous year and increased 30% from the third quarter. Based on this momentum, MBA expects total commercial and multifamily mortgage lending to reach $583 billion in 2025, marking a 16% growth from the estimated $503 billion in 2024. Despite challenges related to maturing loans, MBA's chief economist, Mike Fratantoni, forecasts growth across various property types and capital sources, supported by expectations around interest rates and the broader economy.
In a press release titled ""Commercial Real Estate Lending Momentum Accelerates as "Wall of Capital" Meets Strong Mark Fundamentals"" CBRE discusses how commercial real estate lending saw strong momentum in Q4 2024, driven by abundant capital and solid fundamentals in most sectors. The CBRE Lending Momentum Index, which tracks CBRE-originated commercial loan closings, rose 21% from Q3 2024 and 37% year-over-year, closing the quarter at 259, well above the pre-pandemic average of 229. The average spread on closed loans narrowed by 49 basis points compared to the previous year, with multifamily loan spreads tightening to their lowest levels since Q1 2022. Despite a slight pullback in market activity due to changes in Treasury rates and recalibrated expectations, strong capital support has kept spreads competitive across various credit markets.
CBRE is optimistic about 2025, expecting more refinancing and investment activity, particularly in the office sector for top-tier assets in major cities. The refinancing and investment sales market will likely be fueled by maturing debt and strong fundamentals. In Q4 2024, banks significantly increased their share of non-agency loan closings to 43%, up from 18% in Q3 2024, benefiting from regulatory changes and balance sheet cleanup. Life companies followed with 33%, and alternative lenders, including debt funds, made up 23%. The CMBS conduits sector shrank to 1.5%. Government agency lending for multifamily assets surged by 87% to $53 billion in Q4 2024, contributing to a 19% increase in full-year origination volume. Additionally, agency mortgage rates dropped to 5.4%, the lowest since Q2 2023.
2025 is gearing up to be an interesting year as the MBA reported this week that 20% of the $4.8 trillion of outstanding commercial mortgages held by lenders and investors will mature in 2025.
NOTE: HUD has issued policy updates revising underwriting constraints to pre-2008 levels and introduced a new Middle Income Housing Program. Program changes reducing DSCR to 1.15x and increasing the LTV to 87% for market rate refinances (80% for cash out). Affordable is now constrained by 90% LTV/LTC with a 1.11 DSCR. The Middle Income product is also 90% LTV with a 1.11 DSCR.
News and Notable Reports
