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Time to hedge interest rates amid inflation?

Fed’s probably done with rate hikes

“We have probably seen the last hike and the next Fed move will probably be a rate cut,” Conklin told CBRE. “It’s basically the clarity we’ve been looking for, for the last 12-plus months once the Fed embarked on the second most aggressive tightening cycle in history. So I think we’ve seen a peak with floating rates. They’ll probably level off for some time and then the Fed will start cutting – some point later on this year, or the beginning of next year. 

He provided a snapshot of the debt capital markets today: “Right now there is a general overall freeze in the tech capital markets,” Conklin said. “I think lenders are struggling with how to underwrite interest rate exposure. I think borrowers are struggling with how to underwrite a deal with so much uncertainty around this Fed tightening cycle. If you go back to November 2021, the Feds said they weren’t hiking at all and then they hiked 5% in a year. So there’s just a lot of uncertainty. I think everyone’s really just waiting for a Fed pause so that they can start dipping their toes back in the water.”

Waiting for the big thaw

For her part, Carhart expressed optimism over a possible thaw. “Interest rates have doubled from where they were a year ago, which means we have a serious cramp on transactional volume,” she said. “Not only on debt, but on investment sales transactions nationally. If you think about five plus percent rates, I think the inflection point for people to want to transact is probably right around 5%. And today we’re getting closer to that, which makes me optimistic that this freeze will maybe thaw a bit.’

Carhart explained how shorter term fixed-rate loans are the preferred option given flexibility. But first she started by describing the types of financing offered: “There are two types of financing you can pursue if you have a transaction, which is fixed-rate debt or floating rate debt,” she explained. “Most debt the last couple of years has been done via floating rate because the rates are very low and they provide a lot of flexibility. Fixed-rate debt is exactly that. It’s fixed for a period of time. In a low interest rate environment that can be advantageous, but you don’t have flexibility.”

She described the impact inflation has had on the loans front: “Well, floating rate has gotten increasingly expensive and cap costs are increasingly expensive,” she said. “So we’re seeing borrowers migrate to shorter term fixed-rate loans to get some near-term flexibility versus 10-year fixed-rate loan, which has been the predominant term with the likelihood of interest rates going down. Most people think that it’s not advantageous to lock in a 10-year loan today because most likely in two years that rate would be significantly lower. “

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