Chicago, Illinois, June 1, 2017- “The Day the Rates Stood Still” would be the title of a real estate finance sci-fi thriller describing the state of the capital markets. Over the past month, numerous trading days resulted in the same rates as the previous days, a pricing pattern not seen anytime earlier this year. The reduced rate volatility indicates the markets expect relatively modest rate hikes in the next few months.
In capital markets awash with investment funds, such conditions favor tightening mortgage spreads as rate-hike fears calm. The overall flight to higher quality, safer fundings creates even more pressure to tighten spreads due to the limited supply of such lending opportunities. As the domestic economy keeps humming along at the currently favorable pace, expect long-term mortgage spreads the investment-grade assets with lower leverage to reach down toward the 100-basis-point range.
Today’s lower debt costs come as tremendous relief to the industry given numerous other issues facing owners. For example, in certain pockets of the U.S. rents are difficult to maintain [and increase] within the apartment sector due to the onslaught of new supply. On the commercial front, disruptive technologies and changing consumer habits place relentless pressure on retail and office properties to integrate bricks-and-mortar with internet spending habits. As was a common theme at the International Council of Shopping Centers’ major RECon 2017 event, it is not a question of retailers needing to sell via bricks and mortar as opposed to online – the question is how to optimize using both! Finally, operating expenses for all property types are rapidly escalating due to higher labor and material costs. In the end, owners must allocate more funds to operating, over and above debt service.
Ms. Jeanne Peck of The Real Estate Capital Institute, notes, “Steady debt pricing is welcomed relief for the industry. Instead of worrying about rising debt-service costs, owners can allocate more spending on technologies that improve income while reducing expenses.”