Real Estate Capital Scoreboard® – May, 2017

Chicago, Illinois, May 1, 2017- Overseas “shock” events in North Korea, Turkey and Syria spread market jitters, as investors flock to the safety of US government treasuries.  Even with the Fed’s policy to control inflation with interest rate hikes, longer-term treasuries stubbornly move downward to levels not seen since last fall.

Borrower keep winning under such circumstances, capturing permanent fixed-rate debt within the higher-three-percent range to the lower-four-percent range for most types of conventional loans.  However, shorter term rates also start with a three-percent handle, since floating rate indices move in tandem with Fed benchmark rates.  More specifically, even as treasury notes dropped about a quarter point since the beginning of the year, 30-day Libor rates rose by about the same amount. A flattening yield curve is the result – long rates are the “sweet spot” in the realty capital stack.

The markets are flooded with capital and no shortage of real estate debt exists.  Yet lenders are more cautious given the current point in the economic cycle, and more equity is typically required to attract decent financing terms. The longer-term lending market based upon the lowest rates is dominated by life companies. Agencies comfortably capture multifamily loans, often providing attractive pricing/leverage combinations and programs to foster value add and affordable housing.  Conduits focus on larger single-asset securitizations and higher-yielding loans that are not good fits for lifecos/agencies.  Debt funds provide higher leverage and more structured fundings, especially bridge loans for asset repositioning situations.  Banks fund new construction loans, but at more conservative levels than in the past few years.

As for product type, investors continue clamor for multifamily assets this year, with private funds overwhelmingly dominating the market, representing nearly two-thirds of the market share by some estimates.  Foreign investors are in on the party as well, especially in gateway markets.  All in all, while interest rates have climbed since the election, the impact on pricing has been minimal for institutional-quality properties.

The Real Estate Capital Institute’s director, Jeanne Peck, advises, “Global issues help flatten the yield curve.  International demand for safe-haven long treasuries have kept yields stubbornly low… a real benefit for permanent fixed-rate borrowers.”

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