Marcus & Millichap Capital Corp. (MMCC), a leading national provider of commercial real estate financing and capital markets expertise has just released the following commentary for the month of June. The 10-Year U.S. Treasury is trending towards its lowest point of 2017 and the coupon is currently 2.22%. ADP and Moody’s Analytics reported private payrolls surged by 253,000 in May, easily topping expectations as the report was expected to show 185,000 jobs added. Big growth areas are construction, professional and business services. A stronger job market provides the Federal Reserve with more leeway to raise interest rates and its next meeting on rate policy is in two weeks. U.S. equity markets have been trading higher with the S&P 500 and NASDAQ hitting record highs and global equity markets have been relatively stable. Capital remains readily available for multifamily and commercial real estate assets.
• Monetary policy actions set to accelerate.
The 10-year U.S. Treasury rate held below 2 percent until a surge following the election raised the rate above that threshold and potentially established a new and higher range for the benchmark. Moderate economic growth and muted inflation throughout the growth cycle allowed the Federal Reserve to hold off on rate hikes, which has supported additional cap rate compression. However, the Trump administration’s fiscal plans built on higher spending and reduced taxes could accelerate economic growth. Intensifying inflationary pressure under that scenario could encourage the Federal Reserve to quicken the pace of its efforts to raise its short-term benchmark.
• Inflation on the upswing, but for the right reasons.
Though inflationary pressures are beginning to grow, increases are occurring from a historically low base. Further, inflationary pressure has arisen from wage growth and stabilization of oil prices, both positives for the overall economy. Higher wages will encourage spending while inflationary pressure on prices will raise overall consumption, the primary driver of economic growth.
• Underwriting discipline persists; ample debt capital remains.
Multifamily originations increased in 2016, with agency lending dominating the overall marketplace. The government agencies underwrote about $105 billion in loans last year and remain a primary source of multifamily originations in 2017 due to their efficient execution. Acquisition debt remained plentiful throughout 2016, but borrowers’ rates rose late in the year in conjunction with higher Treasury yields and loan-to-value ratios compressed. The combination of higher rates and tighter lender underwriting created some investor caution that could carry over into 2017. A potential easing of Dodd-Frank regulations on financial institutions could create additional lending capacity for other capital sources.
Marcus & Millichap Capital Corporation (MMCC) is a subsidiary of Marcus & Millichap, a leading commercial real estate investment services firm with offices throughout the United States and Canada. Through its network of national, regional and local lenders, MMCC provides capital markets products for a wide variety of investment properties, including apartments, shopping centers, office buildings, industrial facilities, single-tenant net-lease properties, seniors housing, hotels/motels, manufactured home communities and self-storage facilities. In 2015, MMCC closed more than 1,600 commercial real estate financing transactions. ν