2nd Quarter Newsletter
Greetings from Charlotte, where, at the time of this writing, it is 95 degrees with a 101-degree heat index – and I bet many of you have us beat on those numbers. We are firmly immersed in the Dog Days of Summer. Hopefully you found a cooler spot over the July 4th holiday to celebrate our country’s independence with friends and family.
The second quarter of 2024 gave us a peek at the “soft landing” the Fed has been hoping for. After a mixed bag of lingering inflation reports and robust economic numbers in the first quarter of this year, the second quarter saw lower core inflation, but also weaker economic data by way of decreased consumer confidence/spending and an elevated unemployment rate. While the labor market remains incredibly strong, job growth has slowed, and it is apparent that the Fed’s focus is turning towards managing unemployment vs. fighting inflation. As such, the market is now predicting one or two interest rate cuts this year, with the first expected in September (assuming that the decreasing inflation trend holds). Not the four to six rate cuts projected by many pundits at the beginning of the year, but progress, nonetheless.
Higher long-term interest rates, along with increased rate volatility, continued to have an impact on acquisition and refinance activity during the second quarter. The 10 Year Treasury bounced between 4.20% and 4.70% during this time and, fortunately, settled at the lower end of that range by the end of June. But the volatile rate swings impacted both seller and equity partner negotiations during acquisition due diligence and we saw many deals fall out due to increased debt costs and decreased loan proceed levels. Just another variable moving against borrowers in an uncertain market. Note: The ability to lock rates quickly with a trustworthy lending source is paramount during times like these. On a positive note, we saw a good deal of interest rate spread compression at the end of the quarter. We are actively quoting spreads in the 150 – 180 bp range with lower leverage (sub 50% LTV) deals pricing inside of 150 bps over the corresponding Treasury with significant interest-only periods and prepayment flexibility.
While the second quarter continued to be challenging, Medalist Capital had great success in arranging debt capital for multiple transactions in the retail, industrial, multi-family, and office sectors. (Quick sidebar: Yes…loans for office assets. In fact, the largest transaction that we closed in the second quarter was an in-fill office deal with a longtime client. Office debt is certainly difficult to attain, but there are solid permanent lenders still active in that space for the right deal, sponsorship, and location). Correspondent life companies, commercial banks, conduits, and agency lenders were all represented in our second quarter closings. Both our investment sales and equity placement teams had active closings and deal flow during the second quarter as well despite the turbulent market environment. Looking forward, we are presently seeing increased transaction volume and have a robust pipeline going into the third quarter. Of note, we currently have three hospitality transactions under loan application (two construction and one refinance). We are also actively engaged in numerous construction loan assignments given that many of our Sponsors’ core relationship banks are still out of the market or requiring large depository relationships in order to transact. We have our fingers on the pulse of the construction debt space, so please keep us in mind for those capitalization needs as well.
Even with the continued uncertainty surrounding Federal Reserve moves, the Presidential election, and global stability, we do see silver linings in the capital markets and expect an increase in transaction activity over the second half of 2024. Hopefully our next Newsletter includes discussion of the first Fed rate cut since March 2020 and finds us in the midst of a Carolina Panthers winning streak (not holding my breath on that one). Until then, try to stay cool and enjoy the rest of the summer!