Real Estate Capital Scoreboard® – June, 2014

2014-06_RECS_Denver_Source_JohnOharenko

Chicago, Illinois, June 2, 2014 – Ongoing mortgage spread compression, lower treasury yields and less restrictive underwriting are today’s headlines. Investors are constantly surprised about the downward movements in mortgage and capitalization rates.  Many fear of being ‘too late’ to the investment party, but have no choice but to accept skinnier returns given the insatiable appetite for investing in various types of commercial real estate ventures.  Mirroring this trend, key real estate capital market discussion points relating to very low starting yields are as follows:

Commercial properties, namely retail and industrial assets are clearly back on the favored list with most lenders, as funding sources offer tighter spreads and pricing comparable with the most favored property type (multifamily).  The lower range for mortgage rates on conservatively leveraged assets is only represents about a 10-basis-point variance between different properties types (except for hotel and special-purpose assets).   Long-term (10 year) mortgage rates start below 4% for such type of fundings.

New construction is in demand most types of urban infill properties including multifamily, mixed-use and retail developments. Return-on-cost benchmark development yields for such projects start as low as 6.5% in most markets, but can even be 50 to 100 basis points lower in gateway coastal markets.

Insatiable demand for credit-tenant, net leased properties generates capitalization rates starting in the higher-4% range, particularly for ground lease deals.  Credit tenants are more selective on locations, creating a new construction shortage, while tax exchange investors drive the demand side of the market in direct competition with institutional sources.

The Real Estate Capital Institute’s director, Jeanne Peck suggests, “Borrowers are having a field day with competitive financing choices, including structured debt and equity transactions. She adds, “in fact, the biggest competition for the capital stack is within the capital stack as existing lenders and equity investors are willing to contribute more dollars into high quality assets, pushing out mezzanine, Pref equity and other types of hybrid debt vehicles from the financial equation.“

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