Real Estate Capital Scoreboard® – December, 2018

Chicago, Illinois, December 1, 2018 – Recent financial market developments resulting from trade wars, global instability and a cooling economy are giving the Fed reasons to back off from an additional rate hike this month.  Such favorable interest-rate news helps mortgage rates stay in borrower-friendly pricing territory.

Proof of low rates is most clearly illustrated by current benchmark ten-year treasuries priced at 30 basis points lower this month compared to November’s peak level.  This rate almost mirrors April pricing, except for short-term rates, which are now nearly 50 basis points higher.  And compared to the some of the best rates seen this decade (Summer of 2016), overall pricing is about 125 basis points higher — still relatively attractive by modern historical standards.  As is the trend for quite some time, long-term debt continues to be the most attractive funding option vs. short-term loans.

While interest rates hold somewhat steady, other notable realty capital market news include: (1) Agencies comfortably hitting their annual multifamily production targets; (2) HUD guidelines for speeding up processing of Low Income Housing Tax Credits; (3) Life companies meeting their lower-leverage funding goals well before yearend, (4) Banks maintaining strict underwriting discipline on construction lending and (5) Debt funds moving into the more competitive pricing arena in direct competition with mortgage conduits.

Markets remain flooded with surplus capital across all levels of the capital stack, including debt and equity.  Yields are compressed and risk-adjusted pricing is in record-low territory.  Fears of loosening underwriting standards are mitigated with more investor equity than witnessed in previous financial cycles.  Lenders carefully compete on pricing instead of higher leverage, as evidenced by converging perm loan underwriting among conduits and debt fund players.

The Real Estate Capital Institute’s director, John Oharenko, stresses, “Lenders are already starting to dip into their 2019 funding allocations, especially life companies. Some lenders avoid quoting new deals until their 2019 budgets are soon finalized.”

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