A report that the National Association for Business Economics (NABE) published in August
showed either confident or somewhat confident that the Fed would be able to achieve their soft-
landing goal. Bulge bank analysts are beginning to publicly acknowledge the soft-landing
trajectory, and in the blink of an eye, we seem to have gone from recession to slow-cession, to
no-cession. Last month Goldman Sachs cut the odds of a recession for next year, the staff at the
Federal Reserve reversed their recession forecast call, and JPMorgan still acknowledges some
risk, but has backed off their mild contraction call. The same NABE survey has 45 percent of
respondents marking the next recession as starting the second half of next year or later.
While the path to a soft landing has become wider, it is by no means a given, and many analysts
are still considerably handicapping the possibility. If such a soft landing were to stick, then some
assumptions need to be revisited – starting with U.S. Treasury (UST) yields and mortgage rates.
In this scenario, the phrase ‘Higher for Longer’ should just be replaced with ‘Higher.’ A soft
landing means no recession, which would also imply that the 10-year UST is mispriced. It’s
commonly accepted that an inverted yield curve is a recessionary signal, and if we accept the
‘no-cession’ scenario, then the curve needs to un-invert. This would happen more by the front
end of the curve dropping as the Fed gradually cuts their overnight rate from restrictive to
neutral, but the longer end of the curve could also rise in conjunction with growth expectations
for the United States. In short, we would see a yield curve much like the 2002-2007 period, with
shorter-term rates close to neutral, and 10-year UST anchored more closely to four percent than
anywhere else – which would yield mortgage rates much like the upper and lower bounds in the
graph below.
The attempt to stick the soft landing is a laudable goal for the Federal Reserve, and bringing
inflation under control without triggering significant job losses or creating demand destruction
would be a terrific outcome from the aggressive rate hiking campaign the Federal Reserve
undertook. The reality of ‘Higher for Longer’ becoming just ‘Higher’ will have broad downstream
effects, which include elevated volatility. For commercial real estate borrowers seeking debt
financing, positioning yourself to take advantage of the volatility and capture downswings in
Treasury yields should be one factor you consider when lining up your financing options.
TIGHTER CREDIT STANDARDS AND BANK LIQUIDITY
Commercial real estate lending by banks represents one of the largest blocks of available debt financing
in the U.S. market. In the wake of the regional banking crisis, where three of the four largest American
bank failures happened in the span of a couple months and the Federal Deposit Insurance Corporation
was forced to take over, the attention of the market and regulators shifted to analyzing CRE lending and
any complicity this sector had in the collapse of regional banks.
The expectation in the immediate aftermath was that credit standards would tighten and access to
lending from bank balance sheets would dry up. While some of these expectations have come to
fruition, the extent to which credit tightening was expected has not fully materialized, especially for
multifamily products.
Key Takeaways:
Small domestically chartered commercial banks steadily increased their market share in
commercial real estate lending when compared to large banks over the past decade.
All the speculation and assumptions around drastic pullbacks in bank lending have yet to fully
materialize.
U.S. Banking regulators rolled out a proposed rule for stricter bank capital requirements
designed to ensure the stability of both top and second tier banks – called the Basel III Endgame
Multifamily remains a preferred sector, with abundant debt financing options – including banks
– making a play for the limited acquisition and refinance activity the capital markets are
currently seeing.
