Real Estate Capital Scoreboard® – August, 2017


Chicago, Illinois, August 1, 2017 – A busy summer in the capital markets, as the Dow Jones Industrial Average flirts with the 22,000-benchmark as a new record. While stocks rally, interest rates are trending downward, worrying some Fed watchers. These experts warn about bond markets witnessing a correction soon. They argue that historically low debt yields will eventually collide with record-high equity markets, resulting in widening yields.

No doubt, mortgage markets enjoy windfall conditions. Rates are slightly lower than a month ago, but mortgage spreads continue narrowing. Lenders still have abundant capital to place — even at such low rates. Funding different property types is one of the key underwriting components lenders use for increasing yields while balancing mortgage portfolios, as outlined below:

Apartments: Millennials and empty-nesters seek urban living as major lifestyle choices, fueling an unprecedented growth in central business districts and surrounding areas. Most lenders favor this property type for steady performance based upon high occupancy rates typically ranging in the mid-to-higher ninety percent.

Industrial/Distribution: Internet shopping forces a tighter supply chain as consumers demand quicker delivery of goods and services. Retailers morphing into distributors delivering products directly to customers, requiring facilities to be closer to client base – locations near more densely populated areas. Lenders clamor for any reasonable industrial deals, mainly for loan diversification. Limited funding opportunities of any scale exist within this sector.

Office: Astute investors return of suburban office deals due to very competitive pricing, but face many challenges in keeping high occupancy. Prime CBD deals still generate strong demand, as premier tenants want properties that have all the latest bells and whistles. Office underwriting driven by provable cash flow economics combined with conservative leverage.

Retail: A tectonic shift is occurring in consumer shopping habits, as traditional retailers fight to survive by reformulating brick-and-mortar stores with on-line purchases. Major changes lead to new profit opportunities, but with inherent risks. Loan underwriting mainly focused on tenant credit and store sales for “need” based shopping.

Lodging: Investor demand is slowing for both Full and Limited Service hotels. Buyers and lenders are concerned about this property sector’s volatility considering a peaking economy. Yet, high quality sponsorship with strong hospitality relationships will still attract favorable loan terms.

Mr. John Oharenko, member of the Real Estate Capital Institute, notes, “Everything is about high-density development, and lenders understand this very well. It’s back to the future, as far as urban planning and development.”

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