Real Estate Capital Scoreboard® – January, 2014

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Chicago, Illinois, January 2, 2014 – As 2014 unfolds, markets awake to a new long-term treasury benchmark of three-percent-plus, a rate not seen in two years.  The yield level has exceeded many analysts’ expectations for 2013 – there may be room for some volatility in 2014.  Many investors remain more bearish on treasuries and corresponding low mortgage rates, expecting rates to rise 25 to 100 basis points throughout the year.  While treasuries rates increased more than 100 basis points last year, funding sources absorbed much of these increases by accepting lower mortgage spreads.  

In the face of a rising rate environment, major realty capital markets trends for 2014 year include: 

  • Mortgage rates approaching the historical norms of the past decade — within 5.5% to 6% range for 10 year funds and about 4% for shorter-term debt.
  • More funds available for all levels of the capital stack for property types.  Investors are seeking joint venture, preferred equity and other types of funding opportunities in search of more attractive yields.
  • Investors are pulling back on multifamily properties reach stratospheric pricing levels.  Yet strong demand remains for housing in general, as more investors instead move into the single-family sector. 
  • A steady course continues on lending formats as life companies provide the best long-term debt pricing based upon lower leverage, banks tackle markets with floating-rate loans and conduits pursue tertiary markets and more structured transactions.
  • As the economy continues to recover, new construction funds are more available for retail, industrial and lodging properties, but becoming more selective on multifamily ventures. In particular, commercial properties with strong preleasing of 50% to 70% attract attention.  Most construction lenders want to see at least 25% equity based upon project costs.
  • More competitive forward-delivery and pre-sale programs will emerge as investors seek to capture new construction deals vs. tightly-priced, existing project opportunities.

The Real Estate Capital Institute’s director, Jeanne Peck, advises “The ‘action’ in the capital markets is in the new construction arena.   Projects with proven sponsorship in infill locations attract a feeding frenzy among banks; lifecos are designing ways to compete, with a few offering new construction/perm programs.”

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