WHY DEBT IS MORE EXPENSIVE RIGHT NOW
Tightening Monetary Policy kicks off widening spreads by lenders. Since the first federal funds rate hike in March 2022, the capital markets have been disrupted, due to financial market volatility revolving around inflationary pressures and expectations of an upcoming recession. Whether these concerns are warranted or not, they have resulted in not only higher base rates in benchmarks, such as the Secured Overnight Financing Rate and Treasuries, but also higher spreads for permanent financing, bridge financing, and to a lesser extent, construction financing
Wider spreads compound challenge from cap rate compression. Interest rates are not historically high. The current fed funds rate is only 2.33 percent, nearly identical to the April 2019 rate of 2.44 percent, and well under the September 2006 measure of 5.34 percent. Yet, borrowers are currently hamstrung by interest rates, due to the historical cap rate compression that has occurred over the past decade, combined with a widening spread from lenders. The pullback in overall leverage that lenders are willing to lend at is tied directly to cap rate inflation concerns. However, the reason spreads are also wide is more complex.
* Through July Source: Marcus & Millichap Research Services; Federal Reserve