Real Estate Capital Scoreboard® – July, 2018

Chicago, Illinois, July 1, 2018 – Even as the Fed increased rates by a quarter point last month, benchmark five and ten-year treasuries held steady.  Experts have been predicting narrowing spreads and rising indices for quite some time. For short-term, floating rate debt, such logic holds true, but long-term rate behavior has baffled even the most astute pundits.  Investors continue seeking treasuries as financial protection against global turbulence keeping long-term debt borrowing costs low.

Patience is paying off for borrowers waiting to lock into favorable fixed rates, even in the face of more rate-hike threats. Mortgage pricing barely changed as compared to the previous month.  Spreads narrowed by about five basis points from last month.  Longer-term rates for conservatively underwritten loans now hover in the lower four-percent-range; very low leveraged debt may dip below four percent.

Given investor demand for purchasing mortgage debt, the best pricing opportunities favor larger deals (e.g., $30 million plus). Lenders offer more efficient underwriting and effective loan syndications for larger deals.  Interim loan programs, mainly bridge debt, is readily available from banks and mortgage funds, as lenders seek competitive yields by climbing up the risk curve.  Furthermore, interest-only, non-amortizing debt remains abundant. All in all, numerous capital sources will aggressively compete for any reasonably viable real estate venture.

Since debt is very favorably priced, equity investing remains extremely challenging, with no relief in sight.  Yields are squeezed for nearly all asset types and classes.  Even so, many buyers starve for core product based on the belief that core-plus and value-add investment returns are comparatively low given the additional risk.  On the other end of the spectrum, opportunity ventures — particularly new construction — still draw investor attention, but escalating construction costs squeeze yields to paltry levels.  Finding favorable returns continues to be the most challenging responsibility of any investment manager.

The Real Estate Capital Institute’s® director, John Oharenko, notes, “Bargains are few and far between.  Realty investing has risen to new heights as a desirable investment class, both institutionally and with private capital.”

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