Chicago, Illinois, June 1, 2016 – Investors stay puzzled by the confusing combination of global economic malaise contrasted with a strong domestic outlook. Increased housing starts, rising energy costs and wage inflation concern policy makers wanting to pass along additional rate hikes.

Regardless of current rate policy, realty capital markets march forward. Lenders reduce mortgage spreads to stay in step with the competition for higher quality loans. Agencies and life companies stay on target for strong loan production volume for the year, as CMBS markets return to more “normal’ pricing levels.

In summary the lending markets are very active and diverse, as discussed below:

Low Leverage Favored: Long-term rates for 10 years or more range in the high 3%-to-low-4% spectrum, with minimal premium for extending to 15 years or longer. The best rates and terms mostly reserved for lower leverage loans of 65% or less, with more reliance on debt service coverage as properties sell at record prices. The life insurance companies broaden horizons by offering liberal prepayment provisions including par after the fifth year of a longer term loan.

Banks Diversify: Since bank regulators reign in on commercial property lending, particularly higher leverage loans, banks diversify by providing long-term debt, reducing or eliminating recourse. Even as rates rise with the threat of domestic inflation, banks set up additional protection against declining, or even negative rates (as in Japan). “Zero LIBOR” language surfaces to prevent lending institutions from paying borrowers to lend funds.

Alternative Sources Emerge: Higher leverage funds available for both construction and perm debt – but at a price. Unregulated hedge funds and private investors fill the leverage gap to reflect additional risk and limited capital. Pricing is often double or more as compared to traditional sources, usually starting at 6% or more. As profits are lucrative, more lenders will enter this space.

The director of The Real Estate Capital Institute®, Jeanne Peck, acknowledges, “Current lending terms are extremely favorable to borrowers seeking lower leverage loans. Many lenders offer the best of both worlds with long-term rate protection enhanced by short-term payoff flexibility.”