Real Estate Capital Scoreboard® – June, 2018

Chicago, Illinois, June 1, 2018 – From the middle of last month, benchmark rates peaked to their highest levels since 2014. The 10-year treasury topped 3.05% and settled down by 15 basis points by month’s end. The markets are bracing for as many as three more Fed rate hikes this year. Policymakers target a two-percent growth rate, helping to create [and prolong] the following trends:

Higher Rates AND Spreads: Unlike earlier this year when funding sources often absorbed rate hikes with tighter mortgage spreads, pricing is widening. Overall rates are about thirty basis points higher than a month ago. Furthermore, higher leverage loans (e.g., 85%) substantially widened by about a percent. Today’s rates are in the mid-four-to-five-percent range for permanent debt of ten years or longer for lower leverage loans. Higher leverage pricing starts with a five-percent handle.

Real Property is Real Safe: Even with rising rates, investors want solid and safe yield alternatives to stocks. For the most part, commercial real estate supply-demand basics appear balanced. Fundamentals remain solid across property types, with some concern of overbuilding in select multifamily markets. Credit-tenant properties attract the most demand, followed by industrials, apartments, retail and office ventures. Prime senior, student, self-storage, datacenter and lodging assets attract competitive pricing that closely competes with traditional property types. More and more, investors are turning their attention to infill and transit-oriented locations, moving away from focusing on separate asset classes, with mixed-use properties emerging as favored investments.

Mission Money: Social investing gains momentum as financial institutions and governmental agencies tackle a myriad of real estate issues. Investors and developers work with municipalities to solve workforce housing demands by negotiating favorable zoning, property tax relief, etc. Meanwhile, attractive financing surfaces through availability of construction loans, as well as higher leverage and lower interest rates. In exchange for favorable long-term debt, owners frequently agree to maintain lower rents in conjunction with the debt term.

The Real Estate Capital Institute’s® director, John Oharenko, notes, “Creating a ‘perfect deal’ from the financing perspective would be focused on an urban, infill mixed-use project with a balanced affordable rental component.”

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