Commercial Capital Costs Continue to Drop

Capital Markets update from Greg Lewis on 50 basis points reduction. 

Borrowing costs for commercial real estate has come down materially in Q3 and the future looks good. Let’s hope the capital markets continue to stay ahead of any further deterioration of jobs or fundamentals.

The Federal Reserve has cut interest rates by 50 basis points in their first rate cut in over four years! In addition to this reduction, the committee released its “dot plot” indicating an additional 50 basis points cut is expected by the end of the year. All good news for CRE owners. The Fed stated that have “greater confidence” that inflation will return to a normal level and have shifted their focus to the slowing job market. The Committee mentioned the “economic outlook is uncertain, and [they are] attentive to the risks to both sides of [their] dual mandate.” 

The 5 and 10-year treasury markets had already priced most of this move over the last few weeks and months. Spreads have come in materially already this year and seem to be stable. We have locked several deals near or below 5% as of late.

Banks – The normalization of the yield curve will continue to drive better appetite for banks. Deposits are still important but expect banks to continue their recovery toward more activity. Floating rates are coming down, making sizing easier. Fixed rates via swap or portfolio are back in the 7.0 – 7.75% range.

Debt Funds – Many of our clients have the desire to take debt fund money. We are pushing hard for negotiated floors on SOFR to take advantage of the coming drops in SOFR. You can expect to see spreads range between 265-425 bps over SOFR. Many groups are actively pursuing preferred equity positions behind agency senior loans.

Life Companies – Allocations are looking modest through the end of the year and new money in 2025. Corporate bond spreads (the baseline for life company pricing of alternative investments) are also stable. Spreads range from 140bps to 225bps depending on deal size, profile and leverage. That said, most life companies are priced in the low 5% range today. Deal size for our assets remains very high at the $30MM+level.

Gregory E. Lewis
Senior Managing Director of Capital Markets

Leisure Investment Properties Group
Golf | Marinas | Resorts | Master-Planned Communities
17539 Darby Lane, Tampa, FL 33558
Office: (484) 202-8268
Cell: (610) 547-3848
Email: glewis@thelipg.com

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