Chicago, Illinois, March 2, 2015 – February resembled an interest rate yo-yo contest: rates climbed up and down, at times, spinning out of control.  Lender contestants tried to stop the yo-yos from hitting rate floors, while borrowers tried to quickly lock in at the bottom. No doubt, borrowers enjoy low-rate euphoria as most lenders set lofty production goals for 2015.  Notable market highlights are as follows:

•   “Price Discovery” – While spreads are regularly mentioned, floor rates are overtaking spreads as baseline pricing parameters.  Ten-year pricing ranges in the 3.25% to 4.25% via life companies and agencies, while conduits capture 3.75% to 4.5% for higher leverage loans.  Loan underwriting is mostly driven by debt yields of 7.5% to 9%, as extremely low capitalization and interest rates distort debt coverage ratios.

•   “Ditching Double Digits” – Hitting returns in the teens remains extremely challenging.  Mezz/pref equity funds struggle to reach above 9% for parts of the capital stack reaching 80% LTV.  High-teens are targeted for JV funds up to 100% funding with a 50/50 structure or better for the developer.  However, most investors want to see at least 10% equity from the sponsorship.

•   “Rubber Band Man” – Lenders stretch to make deals, including term, leverage and prepayment options.  Longer-term funds of up to 40 years selectively offered by funding sources searching for more diversified debt maturities.  Leverage approaching 75% to 80% by building in mezz debt.  Some lenders promote far more liberal prepayment schedules, even waiving prepayment penalties in the remaining two years of a ten year loan, for example.  Pricing premiums between various longer maturities rarely exceeds 25 basis points, as lenders are flush with cash.

•   “Need for Speed” – Loans must be securitized quicker than ever.  Balance-sheet securitization risks based upon bond market volatility forces conduit lenders to reduce loan warehousing exposure to minimize any trading losses.  Smaller CMBS shops giving way to larger players that can afford take more timing risk.  Also, B-piece buyers are punishing riskier underwriting, so expect more conservatively underwritten conduit deals to go to market sooner.

Jeanne Peck of the Real Estate Capital Institute® sums up the mood of today’s market by noting, “”