Chicago, Illinois, March 1, 2018 – With rising rates in the forefront of headline news, underwriting percent figures reemerge as hot discussion topics as the ten-year treasury note hit a four-year high earlier last month. Noteworthy percent benchmarks include:
“2%-3%” – As the US economy enjoys seven years of prosperity, recessionary fears are nowhere in the foreseeable future. Record-low unemployment not seen in more that fifteen years, accompanied by strong consumer spending and controlled inflation (about 2%) assures favorable economic conditions in the foreseeable future. The Fed’s new chairperson will make fighting inflation a top priority, so rising benchmark [and mortgage] rates are in store with the 3%-plus-level to reappear for 10-year treasuries. European and Asian markets are also strong, with economists expecting over 3% growth worldwide.
“4%-5%” – Mid-single-digit rates are back in the spotlight for longer-term, permanent debt. While lower four-percent-handle rates are still available for more conservatively funded loans, 5% rates are appearing more often – usually for higher loan proceeds – not regularly seen since 2011.
“25%” – Energy conservation measures can really be profitable, not only because of lower expenses, but because of lower rates. Twenty-five percent energy or water bill savings equate to agency multifamily pricing discounts that can also be a quarter percent or more.
“125%” - As mortgage rates climb, and capitalization rates remain low, debt service coverages of 125% or more drive loan proceeds. Loan-to-Value ratios are important, but lenders demand cash flow coverage to drive deals within stated underwriting objectives. However, record-low capitalization rates should continue to benefit sellers, as buyers are still highly motivated to purchase quality realty assets due to limited supplies in prime locations. 150% or more debt coverage attracts the best pricing, especially with life companies. On the flip side, long-term, self-amortizing loans backed by credit income approach coverage closer to breakeven levels.
The Real Estate Capital Institute’s® director, John Oharenko, comments, “Percent figures are always important barometers to watch in realty finance. It’s a numbers game that quickly quantifies lender and borrower risks/reward expectations.”