By: JD Lehman
As a University of Louisville alum, I am typically thrilled when March comes around. The University’s flagship program, which is surprisingly not their men’s golf team, has the opportunity to typically compete for a national title in basketball. And, as a golfer, March Madness means The Masters and its “tradition unlike any other” is at hand.
Though my alma mater lost in the first round (their recent record in the tournament has been as barren as multifamily investment sales in the Southeast), I am optimistic for what’s to come for the program and for real estate in the Southeast. I’m not sure we need to “Beware the Ides of March” but perhaps can look more optimistically at what’s coming.
I did not coin the phrase “Agent of Chaos” when describing our current President, but the headlines certainly present him as such. While I believe that is a lot of noise with news outlets competing for airtime and our attention, Trump continues to make headlines on tariffs, creating economic uncertainty. Obviously, the market does not like that.
CNBC shows that since Trump was inaugurated on Jan 20, the DOW is down roughly 1,575 points or 3.6%. It’s down over 3,000 points from its high on Jan. 30th.
If you remember back in the fall of ’24, rates shot up on the expectation Trump would win the election and his policies would be inflationary. He has not been shy about his stance on tariffs and has not changed his outlook since taking office. I think that is accurate, though there is no consensus amongst anyone as to how inflationary his policies will be.
That said, rates are in 55 bps from their high in early 2025. That’s quite substantial. As it stands on the last day of Q1 2025, the 10-Year Treasury sits at 4.25%. Even with economic uncertainty, it’s been in the 4.30% range for the last 30 days. That stabilization has come with an active new cycle with unpredictable policies and world wide events.
While there are a few reasons as to why that has occurred, which I won’t bore you with, most groups we work with expect Treasury rates (longer term, permanent debt) to stay in this range, meaning the coupon can range anywhere from the low 5% – mid 6% range for permanent debt. While I know that’s a wide range, most of us can do business here as real estate prices are down from their peak.
Even with uncertainty in the global economy, the Fed is still looking to cut rates by 0.50% this year. That’s good news for us all as every little bit helps.
Longer term rates have come in and appear sticky in this 4.0% – 4.50% range and short term rates should move in this year, relieving a little bit of the pressure on floating rate debt.
Even more nuanced is the appetite for real estate credit from lenders and their investors. The coupon rate is based on the risk – free rate, generally regarded as a UST, and a spread, or the risk-premium. Given real estate’s decline in value, most investors who buy securities backed by real estate believe being at 65% LTV of current value is a great, risk-adjusted return. As a result, we’re seeing spreads get more and more competitive. We recently priced a Small-Balance, 5-year Agency deal with a spread below 1.5%. With the current yield curve, that rate today is under 5.5%, with the chance to go even lower. Not too shabby.
On top of that, most lenders we speak with want to double their allocation from last year to this year. With all the money to get out the door, we’re expecting spreads to continue to come in throughout the year. That is most welcome as there is liquidity needed for real estate markets to function properly. Additionally, we are seeing creative programs come to market that offer an alternative to long term, permanent debt. They are not priced as attractively but offer better prepay, more proceeds and interest only, with only a slightly higher coupon. This is very welcome given what is coming.
Much like seeing a Pitino in March, the real estate world cannot evade the coming loan maturities. We estimate there are over $1.2T in loan maturies this year, based on what was extended from last year. For those counting at home, that’s a whole lot!
While there is real pain for some of these assets given when they were acquired and what’s transpired since, this will create opportunities for many investors. The combustion of ’20-’22 could not continue and the market had to reset a little bit.
With lenders starting to foreclose on assets and not granting more extensions, people are being forced to make a decision. For those buyers who are well-capitalized, that creates opportunity. I think our clients will be able to leverage that to their advantage.
I think investors are sensing what I am. Like me when I came off the bench to miss a three pointer in high school, we’re seeing investors get excited about opportunities. The bid-ask spread seems to be narrowing as folks under pressure want out and buyer’s return expectations seem moderate. Though there are headwinds to be sure, with rent being flat, opex increasing in a variety of ways, and rates still higher than what some would prefer, the folks investing in areas with growth seem to be active again. It seems the investment thesis is simple again – buy at a good basis and let the market come to you. The “double your money in 2 years” based on the ZIRP seems to be waning. I think that’s a good thing as I’m not sure that’s what investing in real estate is about.
While I am not cheering for a team anymore, I am excited to see who is crowned the national champion for 2024-2025. And I’m excited this year to start transacting again. Loan maturities, better rates and lenders focused on providing liquidity to the market have us looking forward.
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