Chicago, Illinois, May 1, 2018 – Last witnessed four years ago, the 3% benchmark treasury is the biggest news this spring. Lenders and borrowers alike are adjusting yield requirements, as the Fed expects at least a couple of rate hikes to stay within the goal of managing inflation in light of a strong economy. Since pricing is still very competitive even at higher levels, other trends take center stage, including:
Too Much Money Chasing Too Few Goods: A large variety of lenders leave little elbow room for profitable returns. For instance, debt-fund pricing terms now comparable to major banks offerings last year, with mortgage spreads compressing 200 basis poins or more. Lenders pick their spots with smaller banks locally capturing borrowers by offering flexibility and leverage. Life companies, banks and conduits are promoting more “one-stop” capital stack solutions including pairing mezzanine financing with conventional senior debt. Agencies overwhelmingly dominate multifamily lending with higher leverage loans featuring favorable pricing and supplemental financing optionality. It’s a downward race to the yield bottom.
Blurred Investment Strategies: Core, core-plus, value-add and opportunistic investments are more difficult to segregate. Fund managers struggle with tightened returns between various classes, as overall returns narrowed by at least 300 basis points on the higher end of the risk spectrum. Some of the highest yielding deals are now priced in the mid-teen yield range. Meanwhile, core and core-plus yields trade in the middle-to-higher single-digit range, with minimal room to move downward.
New Construction Deals in Demand: Since existing institutional-quality assets provide minimal returns, investors seek new-construction opportunities, especially for projects under way. Rising construction costs restrict more development supply. Even as new construction cranes crowd urban skylines with apartment buildings, concerns are muted as jobs follow talent to center business districts at a record pace. Also, spec industrial properties briskly sell, often at prices reflecting twenty percent or more premiums over replacement costs.
Mr. John Oharenko, the Real Estate Capital Institute’s® director, suggests, “The party is over for extremely-low borrowing costs. However, permanent [long-term] rates priced comfortably below six percent are still a historical bargain this generation.”