Real Estate Capital Scoreboard® – February, 2020

Chicago, Illinois, February 1, 2020 – Global virus concerns, trade wars, impeachment and the Fed’s steady course on interest rates top the news and scare the stock market.  As a result, benchmark treasury rates plunged since the beginning of the year by about 30 basis points.  In comparison to a year ago, after three rate drop by the fed, the ten-year rate hovers about 120 basis points lower, hitting similar levels witnessed the end of last summer.

Any mortgage rate discussions focus on maintaining underwriting discipline rather than reaching higher profit hurdles.  Lenders scramble to find quality loans, as overall funding activity levels tapper off.  That said, the economy continues to outperform expectations, as the “Great Recovery” continues into the new decade.  And, mortgage rates stay attractive for borrowers recapitalizing most types of debt.

Absolute rates dip to the lower-3%-range for conservative leveraged loans based on ten-year terms.  Higher leverage debt prices about a half-point more for reaching up to 80% LTV.  That said, the most permanent debt stays under 4%, except for debt with Mezz financing for tapping above the 80% level.

Equity investors lament on finding proper risk-adjusted returns, understanding cap rate compression endures.  Low-interest rate expectations drive tighter pricing expectations, with core investors modeling mid-single-digit returns in prime markets.  Otherwise, core-plus, value-add opportunity deals selectively exist, requiring more creativity and flexibility in property types and geographic areas to achieve higher yields.

The Real Estate Capital Institute’s director, John Oharenko, notes, ” For investors seeking yield, it’s a race to the bottom.  Also, global fears override any strategic investment decisions, particularly for overseas investors.  However,  strong real estate markets fundamentals should drive more money into the sector, perceived as safe-haven investments. ”

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