Real Estate Capital Scoreboard® – February, 2014

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Chicago, Illinois, February 3, 2014 – The Nation’s frigid temperatures in the lower to mid-single-digit range accurately reflect today’s mortgage rates.  Interest rates during the past month have dropped precipitously at more than 30 basis points for the ten-year treasury.  And as the weather begins to improve with rising temperatures, so will interest rates as the Fed plans to curb treasury buying activities due to an improving economy.  Yet mortgage rates are expected to remain low in the near future since so many funding sources are aggressively competing for yield and the economic outlook is still uncertain.

Everyone in the funding arena seems to be back in the market.  CMBS markets are reporting substantially lower delinquencies, banks cleared through much of their troubled loans and life insurance companies are under pressure to capture more attractive yields from mortgages vs. corporate bonds.  Across the board, these funding sources are tightening spreads, offering higher leverage and less recourse (where applicable), especially for floating-rate loans.

The new mortgage spread benchmark appears to be 150 basis points.  Rates are already extremely low, starting at this level– about 50 basis points tighter than a year ago.  Meanwhile, within the permanent fixed-rate sector, office, retail and industrial properties capture ten-year at rates also dipping down for lower leverage in the same 150-basis-point-range, but over treasuries.

Expect the 150-bps-threshold to be broken through on a more regular basis as well.  In the multifamily sector, lending competition remains as fierce as ever, despite agencies mandates to reduce loan production.  More conventional lenders fill the void offering spreads over treasuries dipping down to 140 bps for low leverage loans based upon ten-year terms.

Over the long term, Fed policies and investors demand in the face of rising treasuries are causing the flattening of the yield curve.  Five and seven-year notes continue increasing faster as compared to longer-term bonds.  Under these conditions, longer-term rates will eventually rise.  So for the moment, the best mortgage pricing for borrowers is for longer term loans of ten years or more.

Ms. Jeanne Peck of the Real Estate Capital Institute expects, “Mid-one-hundred spreads are more common today, so lenders are becoming more creative to generate greater yields.  More dollars are moving into new development deals, particularly in the commercial property sector which was severely neglected during the Great Recession.”

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