November 1-14, 2023 - Page 25 Finance S ince March 2022, the Fed- eral Reserve has raised the benchmark fed funds target rate 11 times to a 5.25%-5.5% range, the highest since 2001. This pace of rate increases is the steepest in the last 35 years as depicted in the accompanying graph. With the commercial real estate sector being highly sensitive to the blunt force of monetary policy tighten- ing, it shouldn’t surprise market participants that return thresholds and property valuations adjust in accordance with this dramat- ic increase in the cost of capital. As such, let’s explore the current state of the capital markets as well opportunities available in the dawn of a new real estate cycle. The Federal Reserve balance sheet peaked in April 2022 and has since shrunk by over a trillion dollars to $7.96 trillion. Coincid- ing with this, the H.8 Statistical Release report reflects that U.S. commercial bank credit has con- tracted, -2.5% this August year over year. The immediate effects of monetary policy tightening have been felt across the floating rate indexes most associated with com- mercial real estate loans, the Struc- tured Overnight Financing Rate and WSJ prime rate. These indexes have largely increased in lockstep, rising 526 basis points and 500 bps, respectively. On a percent- age basis, the 30-day term SOFR index has risen an astonish- ingly 10,520% over the last 19 months. Additional- ly, as yields for longer dated Treasurys such as the 10-year U.S. Treasury i n c r e a s e d , bond prices c o l l a p s e d , affecting banks like SVB and Sig- nature Bank, which held these securities and were unable to meet customer deposit withdrawal requests. The rapid failure of SVB and Signature Bank forced the Federal Reserve to stabilize the banking industry with the creation of the Bank Term Funding Pro- gram, which offers loans to eligible financial institutions to help ensure that banks have an ability to meet the needs of their depositors. An important aspect of the BTFP is that U.S. Treasurys and mortgage- backed securities would be val- ued at “par,” as opposed to the open market impaired value. The creation of the BFTP is a perfect example of the tug of war between monetary policy tightening and easing. As of Aug. 31, the BTFP has provided loan advances total- ing over $121 billion. To further illustrate the current volatile environment, since June of this year, when we reached peak yield curve inversion of -106bps (10-year U.S. Treasury minus two- year UST), the yield curve inver- sion has flattened to -38 bps. Most of this flattening is attributed to a rapid rise in the 10-year UST reaching yields not seen since 2005. Federal Reserve Chairman Jerome Powell reminds us, “The effects of monetary policy tighten- ing will be long and variable.” As the capital markets remain disrupted, transaction volume across all asset classes remains muted, with third-quarter 2023 sales down 64% year over year, per Goldman Sachs. Loan origina- tions over this same period across a variety of loan securitizations such as commercial real estate col- lateralized loan obligations, U.S. CMBS and agency CMBS execu- tions are down 78%, 58% and 50%, respectively, a reminder that debt is truly the fuel for acquisitions. While higher interest rates and lower transaction volumes weigh on market participants, it should be noted that lenders remain active and loan originations for life insurance companies, agencies and banks all increased in the sec- ond quarter vs. the first quarter. As reported by the Mortgage Bank- ers Association, the percentage of increase in CRE loan originations for life insurance companies, agen- cies and banks were 1.8%, 1.4%, and 0.8%, respectively. Due to their healthy balance sheets, expect life insurance companies to continue gaining market share across the CRE loan origination front as their balance sheets are not under the Capital constraints within a tightened monetary policy First American Exchange is a Quali ed Intermediary and is precluded from giving tax or legal advice. Consult with your tax or legal advisor about your speci c circumstances. First American Exchange Company, LLC makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American, the eagle logo, First American Exchange Company, an d are registered trademarks or trademarks of First American Financial Corporation and/or its af liates. ©2019 First American Financial Corporation and/or its af liates. All rights reserved. NYSE: FAF 800.833.4343 q www. Looking to get the most out of your next 1031 exchange? We understand the real estate landscape is ever-changing,and so is your real estate portfolio. Through nancial strength, solid credentials and expert handling of your tax-deferred exchange, we help you reap the rewards of your investment. Steve Chacon, CPA CES® , Vice President 303.876.1161 | RNB Lending Group Commercial Real Estate Specialist RNB Lending Group is the loan production o ce r RNB State Bank, serving the Denver, Boulder and Colorado Springs market. We specialize in commercial real estate nancing r o ce, industrial, warehouse, retail and medical properties. We can provide loans om $300,000.00 to $ 4 ,500,000.00 structured to meet the client's needs. Our diverse products range om perm to mini perm, re- nance, acquisition, bridge and business lines of credit. RNB State Bank is a family owned bank that has been serving the Colorado and oming markets since 1899. Randall L. Hoffman - President RNB Lending Group 303-772-1389 • Jeff DeHarty Senior vice president, debt and equity, Northmarq Please see DeHarty, Page 49