Key Market Influences to Watch for in 2024
Monetary Supply:
The Fed funds rate is elevated to remove money from circulation—money vanishing into “Fed air.” As of November 30, 2023, $20.77 trillion US dollars was in circulation versus $15.4 trillion pre-pandemic on January 31, 2020.
The Fed Funds Rate:
At a 5.5% Fed Funds Rate, the Fed reduced monetary supply by approximately $80 billion per month; Jerome Powell announced at the December Fed meeting that roughly $1.12 trillion has been removed from circulation. This higher rate affects Banks that borrow money from the Fed overnight window to meet daily reserve requirements. Banks feel squeezed by loans issued at 3.5%-5.0% from 2014 through 2022, placing many fixed-rate loans below the Fed Funds Rate.
Notes Coming Due:
5-year loans originated from 2020 through 2021 acquired at low cap rates and high leverage will be difficult to refinance with average rates currently around 6%-7%.
Banking Regulation:
In 2024, bank regulation will increase loan reserves by an average of 19% above their current levels due to BASEL III requirements for larger banks. This 19% increase is in addition to reserve increases for downgrades on existing loans.
In conclusion, the oversized monetary supply is why the Fed isn’t quickly lowering the Fed funds rate. Combating inflation with the decrease in monetary supply means the Fed funds rate will likely stay higher than 4.5% in 2024, while the 10-year treasury fluctuates depending on investor demand.
Lenders:
- Insurance Companies will continue to offer balance sheet loans priced over Treasuries.
- CMBS and agency lenders will remain a haven for higher LTVs and interest only.
- With the Fed funds rate averaging 5%, most bank balance sheet lenders will have difficulty competing on fixed-rate loans.
- Many banks will shrink the size of their commercial real estate portfolios due to increased reserve requirements and the need to balance loan-to-deposit ratios.
David Bruni
Principal
dbruni@slatt.com