Chicago, Illinois, December 1, 2016 – Last month’s surprising election results and the Cubs World Series win are reminders of a changing order.  The markets quickly reacted by expecting the Trump administration to boost the economy with domestic job growth and less regulatory constraints.  Investors anticipate an interest rate hike this month barring any unpredictable global incidents that stymied such actions hikes in the recent past.

As for last month, treasury rates skyrocketed by more than 50 basis points.  After all the changes in treasuries and mortgage spreads, today’s rates are about that same as a year ago.  Other comments relating to realty capital markets as the year-end approaches include:

Steady spreads: Treasury rates rise, but lenders still find value in current mortgage pricing relative to corporate bonds and other debt options.  Simple rule… Lenders with full deal pipelines are holding spreads, while those with lagging production may drop spreads by 10 to 20 basis points in an effort to increase loan volume.

Underwriting Discipline: Debt funding sources maintain more restrictive underwriting including debt service coverage, loan-to-value restrictions, cash out and other items in an effort to comply with regulatory changes (e.g. Dodd Frank).  Should the new administration liberalize financial institution legislation, expect slightly more aggressive underwriting.  However, equity markets are still clamoring for quality product with investors more than willing to supplement lower leverage debt with equity funds.

Cooling off: This year record volume of investment sales and financings tapering off to more “normal” levels as new-construction volume subsides.  Depending upon how treasury rates move, the market will readjust capitalization rates accordingly, although not proportionally since an insatiable appetite for quality product outpaces debt costs.

Battle of the “Urbans”:  Urban vs. suburban CRE investment trends favor return to select suburbs, particularly infill communities with strong public transportation linkages and walkability scores.  Capital sources warming up to better profitability in such areas that have been neglected during the current economic cycle.

The Real Estate Capital Institute®’s director, Jeanne Peck, notes, “Overheated markets are returning to more stabilized levels; but keep in mind, even with the recent upsurge in interest rates, debt costs continue to hover near historic lows.”