The interest rate shift | Wealth Management

The most significant change from previous surveys pertains to expectations on interest rates. After a period of rate increases, the Fed reversed course in late July and lowered rates for the first time in more than a decade. So, it’s no surprise that after a clear majority expected rate increases in previous surveys, this year only 20.5 percent expect rate increases in the year ahead, while 43.6 percent expect rates to remain flat and 35.9 percent expect them to fall.

In terms of predicting the Fed’s course of action, responses were fairly evenly split. The most popular response was that the Fed will decrease rates once (32.0 percent), while 25.5 percent expect two decreases and 3.9 percent expect three or more decreases. In addition, 14.2 percent said rates would be flat, while 14.7 percent said the Fed would raise rates once, 8.7 percent said there would be two rate increases and 1.1 percent said there would be three or more rate increases.

The common mantra throughout this cycle is that underwriting has remained disciplined. Yet respondents were split on whether commercial real estate lending is repeating patterns from the last cycle, with 27.9 percent who said “yes,” 39.3 percent who said “no,” and 32.8 percent who were not sure.

And while some respondents wrote in answers to open-ended questions that they had concerns about loosening standards, a plurality of respondents (45.3 percent) said underwriting standards will remain the same in the next 12 months, which matched last year’s results. Another, 42.4 percent said underwriting will tighten over the next 12 months (up slightly from the 39.4 percent who answered that way in 2018), and those who think underwriting will loosen fell to 12.3 percent from 15.6 percent last year.

One respondent wrote, “Lending standards continue to be extremely strict and aimed at entrenched developers.”

Another respondent argued, in fact, that lenders may be too cautious. “Lenders are too conservative in order to avoid potential entanglements with regulators. This is choking off new lending and creating barriers to financing otherwise worthy projects.”

More than half of respondents anticipate that loan-to-value (LTV) and debt service coverage (DSC) ratios will remain the same in the coming year, at 54.3 percent and 58.5 percent respectively. A roughly equal amount of respondents believes LTV ratios could increase (20.7 percent) or decrease (25.0 percent). On DSC ratios, more respondents thought they were likely to increase (33.8 percent) than decrease (7.8 percent). Those numbers were largely in line with the responses in previous surveys.

Lastly, when it comes to the risk premium (the spread between the 10-year Treasury and cap rates), just over half expect the premium to remain flat (50.1 percent), while another 35.9 percent expect it could increase. That’s a shift from last year, when a majority (51.7 percent) said it would increase vs. 33.1 percent who said it would remain flat.