Wake Me Up When September Ends
Green Day wasn’t singing about the bond market, but they might as well have been. On September 23, yields on the 10-Year and 30-Year Treasuries skyrocketed to levels not seen since 2007. The 10-Year hit 5.1 percent and the 30-Year touched 5.4 percent. This isn’t a blip; it’s a regime change that just slammed the door on cheap money for New York City developers.
One week earlier, Federal Reserve Chairman Kevin Warsh announced a rate hike, moving the Federal Funds Rate from 3.75 percent to 4 percent. The board voted unanimously, 12-0, to tighten the screws. For a city built on leverage, this is bad news. The “higher-for-longer” era is here, and there is no cavalry coming to save the day.
The Math No Longer Works
The impact on borrowing costs is immediate and brutal. Jonathan Roth, co-founder of 3650 Capital, put it plainly in recent reporting. “The big picture is it’s more difficult for borrowers, owners and operators alike because everybody was remaining hopeful that rates would ease back down,” Roth said. That hope is gone.
When the 10-Year Treasury climbs past 5 percent, it pushes up the cost of everything from mortgages to corporate loans. The result is a freeze on new projects. “It means it’s now very difficult to pencil out new developments or value-add situations or just regular acquisitions, and that means that new construction will become increasingly difficult,” Roth explained. The belief that the market would turn has evaporated.
Data backs this up. Housing starts dropped 2.6 percent in August, while multifamily starts plummeted nearly 22 percent. Completions fell 12 percent, reaching the slowest pace since late 2018. Lenders have cash, but they aren’t lending it to risky ventures. “The difference now is that the market in 2024 and 2025 expected rates to come down,” Commercial Observer noted, but those expectations were wrong.
A Winner’s Circle for the Rich
Here is the twist: while small players get crushed, big lenders are swimming in cash. As of late August, a record $56 billion in dry powder was held by commercial real estate debt funds. Private credit funds have grown their books by roughly $104 billion since 2019. There is plenty of capital, but it is only chasing the safest deals.
But he warned that only viable projects get funded. If a project proves viable, ample capital exists to fund construction, and the deal typically faces a competitive market.
The problem is the equity side. Jeffrey Rosenfeld of North River Partners observed that with fewer developers able to raise the necessary equity, lenders are fighting over a shrinking pool of safe bets. “It’s symptomatic of the environment we find ourselves in,” Rosenfeld said. Only the well-connected survive.
The market is stuck waiting for a fix that won’t happen soon. The Federal Reserve’s decision on September 16 set the tone, and the Treasury yields have followed suit. This belief that you can keep extending has really started to erode.
New Yorkers should expect fewer new buildings and higher rents as developers pass these massive costs to tenants.
This is opinion and commentary from the RapForMayor team.
