At her first news conference as Federal Reserve Chairwoman, Janet Yellen turned out to be a hawk in dove’s clothing, or so it seemed. The general consensus on Yellen before she took the post was that she was dovish but when pressed about when the Feds might raise rates, she gave a timeline: around six months after asset purchasing (known as qualitative easing) ended later this year.
The new Chairwoman’s response to the question was a little too transparent it seems and the stock market reacted, if briefly. Does this mean Yellen has stepped into the role of leader and been transformed into a hawk? Probably not. What it means is the Chairwoman has just learned the power given to her literal words.
In fact, a few days later, Federal Reserve Bank of St. Louis President James Bullard was quoted by Bloomberg News as saying that Yellen’s statements were right in line with what everyone expected all along: rates will begin to rise around mid-2015.
At Liberty SBF, we’re also watching the Federal Reserve for clues to predict where rates are going and how this will affect the Commercial Real Estate market. The bond market did not react nearly as much as the stock market, and that’s where we like to keep our eye when it comes to real estate financing rates. If anything, the market reacted to the more predictable Federal Reserve statement instead.
The mix of economic data hasn’t given the Federal Reserve much room to diverge from its current path and we fully expected it to stay the course on rates and bond-purchase reduction to $55-billion per month. It did both.
The phrasing of forward guidance on rates was as important as anything else coming out of this last meeting. In its statement the Federal Reserve tried to decouple itself from its previous position, tying rate hikes to the unemployment rate. Where before the Federal Reserve said it would hold rates until after that indicator dipped below 6.5 percent (and inflation stayed below 2 percent), it seems the agency is now looking at more than those numbers alone.
This is a good thing because the unemployment rate only shows part of the picture. Underemployed and long-term unemployed rates have to be looked at as well as the number of people who feel comfortable enough in their current jobs to begin spending money on major life purchases like first-time home buyers. In the manufacturing industry, jobs haven’t come back from pre-recession levels at all and this needs to be taken into account too. The jobs picture isn’t complete yet and when it becomes clearer, that’s when the Federal Reserve should consider raising rates.
The Federal Reserve also thinks bad weather slowed growth in the beginning of this year but it will not affect the economy going forward. Reflected by this opinion is the March ISM Manufacturing report where some respondents said that bad weather affected business and others reported that the year was off to a good start and optimistic about the rest of 2014.
If a pent up demand for orders kicks in over the next few months as the ISM report shows and with a low rate environment, then we might see the predicted rebound. How can the industry take advantage of these low rates while maintaining production and increase job creation in the sector? Here are two programs that can help.
An SBA 504 loan product is perfect for business owners who will use it to purchase fixed assets like real estate or equipment. The SBA 504 Debenture rate was at a 20-year fixed rate of 5.03 percent in March 2014. And this program can finance up to 90 percent loan-to-value on acquisitions. Owner-occupied real estate owners still have the opportunity to lock in historically low rates for two decades, well past the time when the Federal Reserve is expected to reverse course.
A bridge loan can get a business though a stretch when it needs capital quick. Some are even based on LIBOR, (as opposed to the Federal Fund Rate), which are also close to all time lows and given the short-term nature of these bridge loans, borrowers are able to take advantage of flexible financing at affordable rates to execute value-add business plans.
Despite the clamor over Chairwoman Janet Yellen’s news conference, the Federal Reserve did and said everything market-watchers expected. And if rates are to go up in a year or so they will probably do so very slowly. That means able opportunities exists for the industry to take advantage of low rates in the commercial real estate marketplace whether it’s a new purchase for an owner expanding a business or a strategic finance strategy with a bridge loan product.
Alexander Cohen is Chief Executive Officer at Liberty Small Business Funding (Liberty SBF) a full-service commercial real estate finance company that provides loan origination, loan servicing and lender services. Liberty SBF has a special expertise in small-balance commercial lending, lending directly from its balance sheet and originating loans for its investment partners. For more information about Liberty SBF, please visit www.libertysbf.com.