Chicago, Illinois, July 1, 2017- “Fed Fighting” is a popular sport today as the Fed and bond investors spar over interest rates. The Fed’s quarter point rate hike last month did minimal damage to long-term treasures, only rising about 15 basis points on ten-year notes. The Fed firmly believes that tight labor markets will continue to fuel inflation. On the other hand, investors see modest economic growth combined with less government spending, looming tax cuts and lower energy prices.
The second Fed rate hike has done minimal damage to CRE borrowers. Mortgage pricing persists at favorably low levels in line with relatively flat yield curves. Spreads stay somewhat unchanged as lenders scramble to find applicable funding opportunities. This has been the case for much of the past few years. Lenders cautiously limit new construction dollars, keeping property supply in check as demand rises with a steadily improving economy. Longer-term mortgages can still be fetched starting around 4%.
Lenders flush with cash are cautious on property quality, but generous on mortgage rates. As lower leverage pricing remains in the lower to mid-4%-range for many loans, properties with higher risk/reward profiles capture rates starting at 5%. Very entrepreneurial funding opportunities can still be funded in the single-digit range, including higher loan leverage ventures of up to 85%.
Developers are venturing into other property types above and beyond multifamily projects, as pricing peaks, even for marginal deals. Furthermore, suburban properties of all types attract more attention as urban infill investments are priced to perfection. Expect lenders to be more receptive to office and retail properties, in general, as portfolio diversification is becoming an issue. Mortgage pricing for these alternative investments should be competitive, especially if projects can demonstrate solid cash flows.
The Real Estate Capital Institute’s director, John Oharenko, argues, “Low mortgage rates are here to stay, as bond investors see fewer attractive investment opportunities. CRE fundamentals continue on a solid track, assuring steady demand for mortgage debt backed by reasonably predictable cash flow.”