Real Estate Capital Scoreboard® – April, 2018

Chicago, Illinois, April 2, 2018 – Last month’s Fed rate hike was a result of a stable and strong economy characterized by tight labor markets. As short-term rates climb, long-term rates stay stubbornly low. Today’s prime rate, 4.75%, is often more costly than typical ten-year mortgages. As a result, borrowers are rewarded with better pricing for securing long debt instead of riding with floating rates. After adjusting for compressed mortgage spreads and treasury rate hikes, mortgage rates are about the same as January of last year. Given these “inverted term” mortgage market conditions, the following observations are noted:

Volatility: Even as the Fed is expected to raise rates throughout the year, global events dominate pricing beyond monetary policy control. March’s five and ten-year treasury movements in excess of 15 basis points prove that less predictable rate behavior is now “normal.” Also, the same two treasury notes are only 18 basis points apart, historically out of balance.

Tight spreads: Even as conduit pricing widened over recent weeks (nearly 20 basis points during the past quarter), relentless competition from other sources and lack of product keep loan spreads from widening too much. Mortgages still provide attractive pricing as compared to equivalent corporate bond yields.

Creativity: Above and beyond pricing, lenders now generously offer interest-only payments as part of the underwriting. Expect to see even more “freebies” [or at substantially reduced costs] such as appraisals and third-party fees incorporated into the loan closings. Bridge lending programs prove to be popular forms of creative financing for value-add properties with about a hundred funding sources targeting such opportunities.

Variety: A multitude of lenders target different components of the capital stack, offering many attractive funding choices. Banks stay on the short end of the term curve; Life companies and conduits battle for longer-term debt; Agencies target all types of multifamily opportunities and debt funds provide higher proceeds. With so many sources, pricing consistency varies as lenders continuously adjust offerings. Advertised pricing and terms will often improve – at times dramatically—due to intense competition.

The Real Estate Capital Institute’s® John Oharenko, recommends, “Loan underwriting is evolving quickly as lenders juggle with finding winning funding formulas. Commercial real estate is still a darling sector for investment managers.”

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