Real Estate Capital Scoreboard® – April, 2016

Chicago, Illinois, April 1, 2016 – The Fed’s decision to maintain rates during the mid-March meeting illustrates that global economic issues outpaced any fears of domestic inflation, as mortgage markets and bond investors are adding yield premiums in anticipation of further hikes later in the year.  During the month benchmark five and ten-year treasuries modestly dropped by just over ten basis points.

Early signs of “price discovery” influence investor behavior and expectations as first quarter sales activity for commercial real estate fell well below 2015 records levels.  Investors are taking a breather from bidding wars as debt availability tightens due to conduit pricing volatility.  Meanwhile banks adjust loan exposures slightly downward pressured by new regulations initiated this year.  Yet investor demand for high-quality assets continues unabated by foreign investors seeking safe haven, even as domestic investors retreat.

As spring begins, the conduit markets are showing some signs of improvement with Triple-A traches of debt selectively trade over 30 basis points lower than earlier this year.  Mortgage bond investors prefer the improved collateral offered in the most recent issuances, as conduit lenders become more selective with choosing loan opportunities.  Also, fewer loan pools have hit the markets in recent months, creating limited supply of offerings.  Other noteworthy trends within the debt markets include:

  • Despite a Treasury rally with declining rates, lenders are establishing benchmark floor rates for various types of properties. (e.g., 3.75% to 4%).
  • As CMBS players thread cautiously and widen spreads, agencies, banks and life insurance companies are experiencing backlogs with loan requests; the trend is shifting towards a “lenders market” versus “borrowers market.”
  • Mortgage rates at very favorable levels especially for lower leverage debt, despite tightening underwriting requirements.
  • Current banking and conduit regulations along with changes in public market that pricing further constrained mortgage capital formation. Expect more nonregulated private capital sources to fill the void, but at pricing premiums, generally 5% or higher for longer term fixed-rate debt.
  • Pricing volatility for CMBS debt creates widening of at least 75 to 200 basis points or higher than similar bank and life insurance company debt. Full transparency is the hallmark for working with conduit loans for helping to manage pricing expectations in the midst of uncertainty.

The Real Estate Capital Institute’s® director, Jeanne Peck, claims “Spring brings more clarity to the capital markets, as both debt and equity investors tread carefully.”  She adds, “Tertiary markets and more challenging properties will witness wider pricing, a healthy phenomenon, as the markets return to more ‘rational’ underwriting levels.”

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