Request your interest rate cap execution checklist

On Wednesday, September 9, Chatham executed the first SOFR-indexed interest rate cap on behalf of a commercial real estate (CRE) borrower in conjunction with the closing of a CBRE-originated Freddie Mac financing.

The Fed has adopted a “flexible form of average inflation targeting” that aims for inflation rate to average 2% over time. Under this framework, the Fed funds rate will likely stay low for longer. Also, there will be an elevated emphasis on the maximum employment objective of the dual mandate.

An interest rate forward curve for a market index is, at a discrete moment in time, a graphical representation of the market clearing forward rates for that index.

The Agencies are on track to transition to SOFR as an index for floating-rate loans by EOY. Applications for SOFR indexed loans may be seen as early as this month. Liquidity of SOFR interest rate caps is limited but Chatham is optimistic that they will be available for closing these loans.

The interest rates on which CRE investors focus are comprised of real rates, inflation expectations, and credit spreads. Understanding how macroeconomic conditions impact these components and a good risk management policy provide a framework for managing interest rate risk.

In reviewing what has transpired in the commercial real estate (CRE) lending markets over the past six months, we found it helpful to re-read our market commentary as it was written at the end of each of the last three quarters.

After a record 20.4% monthly contraction in UK GDP in April, the expectation was that with some businesses able to reopen under strict conditions in May, there would have been a solid rebound in output.

Now that we’re halfway through 2020, let’s examine how we got here and what the second half of the year might bring.