By Will McKenna, Progress Capital

If you’re reading this, congratulations! You’ve officially survived what will knocks on wood go down as the worst year in the CRE industry in many of our careers. Transaction volume fell off a cliff, financing activity dried up across many of the traditional avenues for borrowers, and all the larger companies in our space meaningfully cut headcounts this past year. The theme of my article for this column last year was that the next year will prove to be interesting… I can safely say that I will never wish for “interesting times” again!

One thing I’ve learned over the past 6-9 months in the lending markets is that the death of low-interest rates was not the biggest issue driving the lack of lending, but rather the increased rate volatility. More so than anything else, banks hate uncertainty. Lending dried up the most when banks and other lenders were uncertain where and when we’d find a ceiling to rate hikes and spreads on debt offers widened as a hedge against future rate hikes – which seem to have ended. Following the December FOMC meeting, where the Fed paused on rate hikes for the second meeting in a row, Jerome Powell made a statement that since “inflation has eased over the past year but remains elevated” they plan to “proceed carefully” this year and anticipate three interest rate cuts on tap for 2024. I believe we’ll see more than that, depending on the size of those cuts, but the fact that Powell has come out and signaled an end – regardless of whether they pull back or not – lenders now have the confidence to know what their ceiling looks like and no longer worry about the real monster under the bed, rate volatility.

With the glaring exception of office products, most fundamentals of CRE have remained solid. The higher interest rate environment has led to lower levels of debt being provided to borrowers across the board – the days of 85%+ LTV/LTC loans are probably not coming back anytime soon. While we haven’t seen the type of distressed asset fire-sales many had anticipated, due in part to banks being flexible in working out extensions with borrowers, we should continue to see increased pressure on property owners to de-leverage existing debt with capital calls or sales this year now that financing is more readily available.

The market consensus for 2024 is that rate hikes are over. The Federal Reserve has paused, and many economists are predicting that inflation will continue to moderate and level off over the next few months. If that does happen, we believe that the FOMC will slowly start cutting rates again beginning at their May or June meeting of 2024 and continuing towards a Fed Funds rate of 4.00-4.25% by the end of the year. While many of my readers here may hope to see huge rate cuts and free money again, I don’t believe we’ll get there… but do anticipate much more activity, for both lending and transaction volume, as the light at the end of the tunnel looms closer this year.

Will McKenna is managing director at Progress Capital.