SAN DIEGO — After eight consecutive interest rate hikes by the Federal Reserve since March 2022, borrowers and lenders are wondering when the central bank will reverse its tight monetary policy stance.
Don’t hold your breath.
“There had been an anticipation that the Fed would pivot, so to speak, by June. I don’t think that’s going to happen,” said Beth Mace, chief economist and director of capital markets outreach for the National Investment Center for Seniors Housing & Care (NIC). “When I say pivot, I mean when the Fed is going to [change course on interest rates]. I wouldn’t think that’s going to happen until very late in this year.”
Mace’s comments came during the Q&A portion of Wednesday’s press briefing at the 2023 NIC Spring Conference taking place at the Marriott Marquis San Diego Marina. Nearly 2,000 industry professionals, mostly C-suite executives, are in attendance (see below for more on attendees).
“My two cents is that I’m anticipating inflation will be with us for a while,” said Mace. The Consumer Price Index rose 6.4 percent in January on a year-over-year basis, down from a 40-year high of 9.1 percent in June 2022. However, the Federal Reserve aims to keep inflation at around 2 percent.
The Fed’s aggressive actions appeared to be working as the economy cooled late in 2022, but the non-farm payroll employment report for January showed that employers added 517,000 jobs, blowing past economists’ expectations. In addition, the national unemployment rate fell to 3.4 percent in January, the lowest level since May 1969. “So, that sort of muddied the waters,” said Mace.
The veteran economist fully expects the Fed to raise the federal funds rate at least 25 basis points at each of its next two meetings. At its February meeting, the Fed raised the target range for the federal funds rate from 4.5 percent to 4.75 percent.
“The market is anticipating that the fed funds rate will go up to 6 percent. The Federal Reserve is saying that it will go up to about 5.25 percent,” said Mace. “So, I think there is still a trajectory of higher interest rates.”
The federal funds rate is getting so much attention because it impacts short-term and long-term interest rates. Its sudden rise has put a crimp in the investment sales and debt markets, Mace pointed out.
“If you look at the transaction volumes for seniors housing and all commercial real estate, they really contracted a lot in the second half of 2022. So, I’m anticipating that will continue to be the case and we’ll have slower transaction activity.”
There is still price discovery that needs to occur in the market. Buyers and sellers aren’t on the same page when it comes to valuations amid all this volatility.
Even underwriting a deal right now is challenging, according to Mace. Among the many questions: How much will the operator be able to grow rents? What’s the exit cap rate likely going to be?
All parties getting squeezed
Mace was asked who is affected more by the hike in interest rates, borrowers or lenders. “Probably the borrowers because they are having to pay higher debt service. That’s affecting their net operating income (NOI), and that’s affecting their margins.”
Operators are also facing higher inflation for goods and services. For example, Mace pointed out the average hourly earnings for assisted living workers is currently increasing at a 9 percent annual clip, “down slightly from where it was, but it’s still expensive.”
Debt providers aren’t in a great position either because many of them are under tighter regulatory control in the current environment. The loan-to-value ratios are much lower today than they were a year ago.
“The all-in interest rate for a borrower is about twice what it was a year ago,” emphasized Mace.
The U.S. 10-year Treasury yield, a benchmark for permanent, fixed-rate financing in commercial real estate, closed at 4 percent on Wednesday, up from about 1.7 percent a year ago.
A telltale sign of recession?
One metric to study for possible signs of recession is the yield curve, which has been inverted for several months now. The U.S. three-month Treasury yield is currently at 4.87 percent, and the 10-year yield is 4 percent. Normally, the interest rate on the 10-year yield is higher than the three-month yield.
An analysis from a well-respected researcher that Mace follows indicates that when the yield curve has been inverted for 10 consecutive trading days, a recession ensues within 11 to 15 months thereafter. If that theory holds true this time, a recession will begin in November.
Spring conference attendees by the numbers
As of Wednesday morning, there were 1,953 registrants for the 2023 NIC Spring Conference, a 15 percent increase from a year ago and the largest number of attendees ever for a NIC Spring Conference. “This is a very exciting time for us. We have a really diverse group of registrants,” said Raymond Braun, president and CEO of NIC, during the press briefing.
C-suite executives comprise 73 percent of all attendees at this year’s conference, according to Braun. Slightly more than one-quarter (27 percent) of all registrants are first-time attendees. The number of attendees from the healthcare sector attending this conference is up 18 percent from a year ago to 120. Female attendees comprise 23.4 percent of all attendees at this year’s conference, up 1.75 percentage points from a year ago.
“This diversity leads to different perspectives, experiences and talents to help drive more unique and impactful partnerships,” said Braun.
The theme of this year’s conference is partnering for the future and is focused squarely on the intersection and integration of healthcare and seniors housing, explained Braun.
“We are bringing together healthcare providers, payers and seniors housing operators to consider how we can work together to improve the lives of older adults. Over the next few days, we invite you to attend sessions focused on the importance of healthcare integration and seniors housing’s redefined role in the healthcare continuum.”
Thursday’s opening panel is titled “The Future of Health and Healthcare: How Will Senior Living Operators Differentiate Themselves?”
— Matt Valley