The Aqueduct by Agrippa brings you a semi-weekly dose of CRE insights—just as ancient Roman aqueducts supplied water to fuel the growth of cities, we deliver exclusive resources to keep you informed.

Quick Overview

News Brief

A recent Bloomberg article suggests Goldman Sachs Asset Management is actively investing in commercial real estate debt, particularly in commercial mortgage-backed securities (CMBS).

The firm is focusing on high-quality properties and sees opportunities in industrial warehouses for logistics. CMBS loans outperformed investment-grade corporate bonds in 2023, and Goldman continues to find value in the sector, despite broad concerns.

Key Takeaways

• Focus on Select Properties: Goldman is targeting high-demand, high-quality assets rather than the broader CRE market, which is facing significant challenges.

• CMBS Preference: The firm sees better relative value in CMBS loans compared to corporate bonds, citing solid carry and performance.

• Cautious on Utility Bonds: Goldman is avoiding utility-sector bonds due to concerns over the financial impact of the green transition on balance sheets.

Economic Insight

The CME FedWatch Tool is a resource that tracks and predicts the likelihood of changes to the Federal Reserve’s target interest rates based on futures market data.

By analyzing the prices of 30-Day Fed Funds futures, the tool provides real-time probabilities of potential rate hikes or cuts at upcoming Federal Open Market Committee (FOMC) meetings. It offers a visual representation of market sentiment toward interest rate policy, helping investors, economists, and financial professionals gauge expectations for future monetary policy moves.

Key Points

• Current Expectation: Markets currently assign a 61% probability that the Fed will lower the federal funds rate (FFR) to a range of 4.75%-5.00%, with a 39% chance of a decrease to 5.00%-5.25%.

• Trend Over Time: The likelihood of a cut to the 4.75%-5.00% range has risen significantly, climbing from 25% to 61% over the past month, indicating shifting market sentiment toward a more aggressive easing of monetary policy in response to economic conditions.

• Looking Ahead: For the November meeting, there is a 28.31% probability that the Fed will lower the FFR even further to a range of 4.25%-4.50%.

Essential Knowledge

Interest Reserve is a financial mechanism used in real estate development and other capital-intensive projects to ensure that loan interest payments are covered during periods when the project itself is not yet generating revenue.

In a typical scenario, when a loan is taken out to fund a project, the interest payments are due immediately, even if the project is still in its development or construction phase. Since there’s no income from the project yet, the borrower may set aside a portion of the loan itself to cover the interest payments for a certain period.

Key Considerations

• Usage & Reserve Depletion: Funds from the Interest Reserve are typically drawn on a regular schedule (e.g. monthly) to meet interest payment obligations. Once the reserve is depleted, or when the project begins generating sufficient revenue, the borrower becomes responsible for making interest payments from project cash flow.

• Basic Calculation: Some developers use a simplified formula such as: Loan Amount * Avg. Outstanding Balance (typically 50% to 65%) * Expected Construction Duration * Interest Rate

• Advanced Calculation: More sophisticated developers calculate the reserve on a monthly basis using a forward projection of outflows. This often involves applying a forward SOFR curve (source: Chatham Financial) to account for expected interest rate fluctuations, providing a more precise estimate aligned with actual construction timing.

Newsletter Recommendation

CRE Daily brings you quick, digestible updates on the latest happenings in commercial real estate.

It’s perfect for Agrippa users who want to keep a finger on the pulse of the industry without spending too much time on research (and it’s a personal favorite).

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About the Author: Blake J. Owens is the Founder & CEO of Agrippa. Previously, he closed over $600 million in transactions as the CIO of a Las Vegas based multifamily developer. Connect with Blake on LinkedIn and X for additional insights on CRE, economics, and more.