Fed Meeting Today: Will Interest Rate Hikes Take a Pause in Light of Recent Bank Failures?

by Katie Sloan

Are we facing a ninth consecutive interest rate hike from the Federal Reserve? It’s a question that has been looming, and with the arrival of Fed Day, an answer is finally in sight. 

The past few weeks have seen the second largest bank failure in U.S. history with the failure of Silicon Valley Bank; the failure of Signature Bank; and the downgrade of the U.S. banking system by Moody’s Investors Service. As we await this afternoon’s decision, SHB caught up with several industry experts to discuss their predictions for the road ahead. 

“I think we will be looking at a 25-basis-point hike,” says Martin Kearney, director of commercial real estate with BMO Financial Group. “The Fed has been clear that they are going to raise rents to square inflation, so they have to do something, but I believe they will do the minimum. What will be interesting is the messaging that will follow the rate hike; how will the press release be written? And what will Chair Jerome Powell say in his remarks?”

Isaac Sitt, co-founder and co-CEO of Vesper Holdings, agrees. “I had expected the Fed to tighten by 25 basis points at its meeting this week and I maintain that view,” he says, noting that this will likely be the last rate hike we will see before the Fed reverses course and begins to lower rates in the second half of 2023. 

“We are heading into a period of further tightening of lending standards and increased lender spreads,” Sitt continues. “The biggest problem for our particular industry will be for new development deals where the regional banks have played such an important role. Some of the regional banks will be bought by the bigger banks, and I expect them all to be subject to more stringent government regulations.”

Will Baker, senior managing director of real estate finance with Walker & Dunlop, agrees. “I believe the Silicon Valley Bank (SVB) situation will further tighten lending conditions with regional and community banks, which are being told to tap the brakes on commercial real estate by the regulators,” he says. 

“I do not believe this will have much of an impact on financing from the agencies, other than the improvement of the overall cost of debt resulting from the large drop in treasuries over the past few days,” Baker continues. “But I do think the concern surrounding SVB could result in the Fed limiting the number of rate increases they implement for the remainder of the year.”

Another data point which might play a factor in today’s decision is the consumer price index (CPI). Last week, the Labor Department reported an increase of 0.4 percent in February, putting the annual inflation rate at 6 percent. 

“The Fed has been very clear that it intends to fight inflation, even if that means higher unemployment — in fact, they expect higher unemployment,” says Kearney. “Housing is a large component of CPI, and a significant portion of personal consumption expenditures (PCE) — the Fed’s preferred inflation gauge. We are starting to see those costs slow and even decrease.”

Some sources show true inflation already down closer to 4 percent, according to Sitt. “The medicine of past interest rate hikes takes a bit of time to effect current inflation rates,” he says. “Those past hikes combined with the regional banking crisis should be enough to get inflation under control.”

“My greater fear is of other black swan effects emerging from the economic difficulties that lie ahead, which could put us in a ‘hard landing’ recessionary environment,” adds Sitt. “The massive government pendulum swings of printing trillions of new dollars followed by rapid large interest rate hikes is creating extreme market dislocation.” 

So what advice is there for student housing operators and owners during this time? Make sure you have your debt locked up to ride out the dislocation and bridge to a better market in the future, notes Kearney. “Get ahead of this,” he says. “If you have not already talked with your lender, do it now.”

“On the construction side, if you can secure construction financing, this can be a great time to build as you will be delivering in two to three years when markets should be better,” Kearney continues. “Fundamentals of student housing are very strong, but securing construction financing is very difficult. If you can secure construction financing, you can be positioned to deliver when markets are better and with very little new supply.” 

“Stay the course and focus on your assets and operations,” Sitt adds. “College enrollments have grown in every recession since WWII, and this will be no exception. I look for that growth to be more focused on Tier 1, flagship public universities that offer a desirable environment combined with affordable in-state tuition. When interest rates do come back down, we are going to be extremely well positioned in a sector that is poised for continued success.”

Katie Sloan

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