In April 2022, the Fed began an aggressive campaign of rate hikes to combat inflation, signaling the end of an unprecedented 14-year run of low interest rates. At its December 2022 policy meeting, the Federal Reserve raised the federal funds rate by 50 basis points to 4.25 percent to 4.5 percent, marking a seventh straight rate hike that pushed borrowing costs to a new high since 2008. Fed interest rates were increased four consecutive times by 75 basis points, which indicates they believe previous increases have slowed inflation as intended. However, interest rates are expected to continue rising at a slower pace until at least mid-2023.
Due to the uncertainty surrounding this year’s outlook, agency lending is set to become even more of a necessity for multifamily property owners, as the liquidity and stability of agencies are strengths in tough times. The Federal Housing Administration, Freddie Mac, and Fannie Mae provide stable liquidity, and unlike other capital sources, are required by federal law to remain in the market at all times.
A significant advantage of agency debt is that it provides stable and reliable capital in turbulent markets without re-trading or pulling commitments as we see with other sources of capital. Agencies can provide flexibility through modified prepayment structures, C-PACE loans, easier supplemental loans and variable rate executions, loan terms as short as five years, and preferred or common equity.
Especially for mission business, agency debt remains a competitive non-recourse option. A long-term loan from an agency reduces the risk of borrower refinancing when compared to cash-in refinances (or defaults) associated with bridge debt. It may prove more economically feasible to use agency debt in 2023 than to use short-term debt today to kick the can down the road and face possible refinancing risks should interest rates remain high or the economy enters a recession, which is more likely now.
A favorable agency market in 2023 is expected to assist us in delivering $3 billion-plus this year. However, in anticipation of a more favorable long-term financing environment current volatility has driven clients to favor more flexible prepay capital within the next one to two years.