Real Estate Capital Scoreboard® – April, 2019

Chicago, Illinois, April 1, 2019 – The Fed’s announcement to keep rates unchanged sent ten-year treasuries to the lowest levels since the end of 2017.  Discussions of any rate hikes this year are unlikely.  Fed projects one hike for next year, and a rate cut may be justified should the economy start losing momentum.  For the foreseeable future, low mortgage rates are here to stay, as a strong job market is tempered by cautious consumer spending and reduced business investments. 

Noteworthy commercial mortgage pricing trends based upon leverage, term and rate structure are noted as follows:

Leverage:  Pricing on lower leverage debt of, say 50%, is extremely attractive, starting at 140 to 160 basis points over longer-term treasuries, and even lower for ‘prime’ deals.  Stepping up to 70%, spreads climb by nearly 50 basis points.   Full leverage loans of up to 80% (typically layered with Mezz debt), include another 50 to 75 basis points.  All in all, permanent debt featuring a ten-year term is generally priced in the 4%-to-5.25% range.  Additional 15-20 basis points discounts/premiums available depending upon project leverage and quality.

Term:  The ten-year term reigns as the benchmark timeline for permanent debt.  Given yield curve flatness, five-year debt is priced only 10 to 20 basis points lower.  On the other end of the spectrum, twenty-year debt is about 20 to 25 basis points higher.  Term elasticity is minimal, so longer-term debt remains desirable.

Rate Structure:  Adjustable-rate loans are priced within the 4%-to-5% range, gravitating towards the middle-range.  Similar to term funding dynamics, rate structure pricing is nearly inelastic, as adjustable and fixed-rate debt rates are very similar.  Also, mortgage spreads typically widen when treasuries significantly drop, as occurred last month.  Due to the substantial amount of capital chasing a limited amount of real estate projects, lenders are keeping spreads tight, or unchanged, to stay competitive in the market despite lower treasuries.

The executive director of The Real Estate Capital Institute®, John Oharenko, summarizes current financing conditions by noting, “The commercial realty markets feel flat, in step with the yield curve.  Not too much up or down movement, just a little sideways.”

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