Real Estate Capital Scoreboard® – February, 2021

Chicago, Illinois, February 1, 2021 – Mid-winter capital markets demonstrate steady rates. Since the beginning of the year, longer-term treasuries barely climbed by more than ten basis points – staying in the 100-basis-point range. Fed policy remains unlikely to radically change under the new presidential administration as rates stay unchanged per last month’s meeting. Interest rates should remain steady for now. That said, major realty capital market trends for this year include the following:

Property Types: Attractive lending options and low-interest rates will further support acquisition activity, especially for most multifamily and industrial properties. However, investors continuously seek creative solutions for the survival of other CRE property types. For example, the lodging industry struggles as virus concerns cripple the business and leisure travel, yet multifamily conversions may solve this occupancy dilemma. Retail assets remain plagued by the dramatic shift to online shopping, but more retailers respond with higher service levels by offering curbside and online order pickup.

Ample Funds: Lenders are awash with mortgage capital for well-performing CRE. As a result, expect tight spreads with low-interest rates to fuel more attractive financing opportunities this year. Specially-targeted properties (e.g., affordable and senior housing) will outperform other mortgage pricing sectors, as minimal inventory remains a vexing problem.

Funding Sources: Agencies, banks, life companies, and conduits actively participate in the real estate capital markets. Agencies exceeded production goals last year, expecting to capture more production this year. Banks remain committed to short-term lending, and local institutions fund entrepreneurial deals. LifeCos offers ample long-term debt options, directly competing with agencies and conduits, especially pricing vs. leverage. In contrast, conduits and debt funds offer more favorable leverage with higher pricing.

Pricing: On track with mortgage pricing seen in 2020, longer-term debt can be captured at pricing below 150 basis points for prime-quality assets – mainly apartments and industrials. Otherwise, most mortgages offer pricing of 150 to 200 basis points for higher leverage loans (65%-75% LTV) and other types of CRE asset classes. More recently, some lenders search for more aggressive risk-adjusted returns above 200 basis points by funding conversions, new construction, and re-lease projects.

Mr. John Oharenko, the Real Estate Capital Institute’s director, suggests, “Lenders and investors alike, continue to be surprised by the resiliency of the realty capital markets. Finding deals remains as challenging as ever.”

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