Lower Interest Rates Will Drive Demand for More Capital

The Federal Reserve has continued to cut interest rates as a response to COVID-19. Last week, the Fed cut rates to .5%, and then in an emergency meeting on Sunday, the Fed cut rates a second time to 0% to .25% to help provide liquidity during the outbreak. The rate cuts have shifted market expectations for this year, but will likely help to drive demand for capital, particularly refinancing deals.

“Answering this question now versus a couple weeks ago yields a different answer,” Loryn Arkow of Stroock & Stroock tells GlobeSt.com when asked about capital availability this year. “While it is the case that interest rates were not on an increasing trend in early 2020, the Federal Reserve moved dramatically to cut interests rates to stem the effects of the coronavirus scare.  It is difficult to imagine that interest rates will increase in 2020 given the coronavirus, the inverted yield curve, the Presidential campaign and other factors.”

The rate cuts have been a reaction to market turmoil, but could also create opportunity. “Lower interests rates will certainly drive demand for capital, particularly for refinancings,” says Arkow. “It is difficult to predict the countervailing effect of uncertainties in the economy resulting from the coronavirus and whether that will slow new investment in real estate and give pause to both debt and equity capital sources.”

The market already had a significant amount of debt availability with lenders fiercely competing for deals. With these new rate cuts—even with increased risk—lenders will need to continue to compete for deals. “Lenders that can make decisions quickly and execute on closing with no retrades have a competitive advantage and loyal followings,” says Arkow. “Borrowers are looking for certainty of close, even if pricing might be higher.  Borrowers also value lenders who demonstrate flexibility to agree upon reasonable legal standards and pragmatic solutions to accommodate the realities of the borrower’s business.”