Real Estate Capital Scoreboard® – September 2015

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Chicago, Illinois, September 1, 2015 – Realty debt markets pummeled with widening spreads as treasuries rates rise.  Conduit spreads reached a two-year high, as several mortgage pools crowd bond investors, creating temporary oversupply conditions.

August was a wild roller coaster ride for lenders and borrowers alike as ten-year treasuries suddenly dipped to 2% later in the month on news of Chinese economic woes.  Within days, treasuries climbed by about 20 basis points.  Meanwhile, led by the Agencies, many lenders steadily raised spreads by five basis points increments.  Long-term mortgage spreads are now about 20 to 50 basis points higher than earlier in the spring.

Increasing spreads are likely to continue due to expected ongoing market volatility.   Borrowers and lenders are planning for a rising rate tide.  Domestic job growth and a continuing economic recovery clearly portend higher rates with inflationary pressure.  However, as the Fed threatens to raise rates, a pattern of negative global news dampens any rate hikes.  So for now, borrowers enjoy temporary relief by staying with low-cost, floating rate debt.

All in all, permanent rates for ten-year fixed rated loans range from 3.75% to 4.75%, influenced mainly by asset quality, leverage, debt coverage and transaction size.  Lenders favor more diverse property pools with wider tenancy profiles, hoping to avoid credit risk, especially for larger loans.  Best rates are available for lower leveraged, stabilized deals and for multifamily projects with some level of affordability in the rent levels.

Competition is fierce and runs across nearly all spectrums of lenders.  CMBS lenders dominate higher leverage loans; life companies offer best pricing at leverage levels of 65% or less; Agencies still win loans with repeat-borrowers, while banks flirt more and more with competitive non-recourse debt.   Lastly, debt funds tackle more bridge and mezzanine loans and other opportunistic funding in search of yield.

Ms. Jeanne Peck, Director of the Real Estate Capital Institute® observes, “Rising rates are finally upon us, after several false starts throughout the year.  That said, floating rates are still a bargain, but for how long is anyone’s guess.”

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