On March 22nd, 2023 the Federal Reserve raised interest rates 25 basis points after a week of banking failures and volatility. Old Capital held a Speaker Series event for multifamily investors with an excellent presentation by JP Conklin with Pensford.
Paul Peebles and James Eng opened the Speaker Series with some notes on the state of the market:
- Difficult for Syndicators to Raise Money – with capital tied up in deals, unrealistic return projections and market uncertainty, there are less $100,000 LPs today than have been in the past.
- Private Equity Shops are Being Opportunistic – there is PE looking to invest in multifamily deals, but at what cost? Some are looking to get 15% or more when investing in a deal.
- 1031 Exchange Buyers Dominating the Market – syndicators are less certain to raise money in the challenging market environment so 1031 exchange buyers are more prevalent.
- Bridge Loans are Out of Favor – there were a lot of bridge lenders last year and it seemed like everyone was using bridge financing. Today the spreads have widened to almost 5% and SOFR is close to 5% so the bridge loan pricing is expensive at around 10%.
- Seller Help – buyers are being more conservative than last year with their underwriting and loan proceeds are lower; however, sellers are now offering to help out by providing their own pro-forma—buyer beware!
Jp Conklin on Interest Rates
Thanks for scheduling me on one of the most volatile days in the history of the markets, good timing!
JP jumped right into current events with recent bank failures such as SVB. He recalled his trading days during the GFC where banks went under. The current situation seems a lot like the 2007 and 2008.
One of the main reasons banks are having difficulty is because of the low interest bonds they currently own. When rates were near zero, a lot of the banks bought treasuries at 1% to 2% and now that interest rates are 4% to 5%, those bonds are worth less.
When depositors try to take their money out of the bank, the bank might have to liquidate some of those bonds at a loss and thus the banking crisis unfolds.
This slide is eye opening. The discount window is when you are a bank you can go to the Fed and borrow money. They try to avoid this because it is a signal to the market that there is weakness.
It is usually zero so the fact that is higher than the GFC and Covid might suggest that this is not nothing.
The whole presentation is educational and will get you up to speed on everything that is going on at the Fed and in the economy. Watch it here on YouTube:
