Chicago, Illinois, August 3, 2020 – The ongoing COVID epidemic effects on the nation’s health keeps the economy and CRE markets in limbo. As such, mortgage markets continue functioning based on record-low rates, although at much more stringent parameters than seen in decades. The most crucial underwriting trends include:
Low rates: Favorable rates are here to stay, at least in the foreseeable future, and the Fed shows no plans for raising rates. Inflation appears under control, as the economy continues absorbing more COVID pain with no cure in sight for the next few months. Longer-term mortgage rates hover in the 3% range for desirable real estate ventures.
Conservative Leverage: Historically, 75% to 80% loan-to-value served as the high watermark for leverage. Due to persistently low-interest rates and correspondingly low capitalization rates, 65% LTV emerged as the new benchmark for high leverage debt. This year’s pandemic wreaked havoc on the realty capital markets, creating the new leverage level of 60% LTV or less, as both lenders and borrowers rely on more equity to provide performance cushions based on volatile cash flows.
Selectivity: Given the dramatically different financial performance levels between various property types and markets, funding selectivity permeates nearly all sectors of the CRE industry. Lenders remain cautious by working with existing and favorable borrower relationships, especially for value-add and construction projects. New client opportunities stay limited to conservatively underwritten debt with proven sponsorship. Otherwise, equity financing dominates entrepreneurial ventures.
The Real Estate Capital Institute’s director, John Oharenko, suggests, “For the most part, the realty capital markets are purely defensive, seeking low risk in return for lower rates.”