Real Estate Capital Scoreboard® – November, 2018

Chicago, Illinois, November 1, 2018 – The US Dollar dropped from record levels of the past year and a half. Moreover, the most recent domestic job report shows the lowest levels of unemployment in nearly fifty years. Such news helped minimize treasury volatility during the past month, fluctuating by about 15 basis points. Short-term indices — namely LIBOR – inched upward by only a few basis points. As expected, ten-year treasuries moved to nearly the same levels as the beginning of October, In the end, benchmark rates behaved predictably, given the Fed’s desire to gradually raise rates over the next few quarters.

Lenders worry about potential market corrections mainly based on interest rate hikes, oversupply and economic slowdowns. They flock to quality deals via lower spreads and less leverage as the main underwriting defenses. With lower leverage and favorable debt pricing offerings at hand, borrowers focus on raising more cash on deals. For much of this decade, the capital stack trend continues for generating more equity from yield-hungry investors, so raising money is less challenging than finding good investment opportunities.

As expected, mortgage rate ranges are priced very tightly due to strong demand for investing in realty capital markets. Shorter term, fixed-rate debt offerings (e.g., five years) are priced nearly identical to ten-year debt, encouraging borrowers to take on longer debt mainly via agency, life company, conduit and debt fund sources. Seven-year maturities, are slightly better priced, about ten basis points inside of ten-year debt. However even as short-term debt pricing is less favorable compared to permanent loans, floating-rate bank loans are still popular with borrowers for development and repositioning projects. In these instances, flexibility is more important than pricing.

Fixed-rate permanent debt starts at 4.5% for low-leverage LifeCo offerings, climbing to the six percent range for 80% conduit/debt fund loans. Otherwise, most commonly priced loans are within 4.75% to 5%.

Mr. John Oharenko, director of The Real Estate Capital Institute’s®, states, “Under very competitive realty funding conditions, creative capital stack solutions are the norm, not the exception. Commercial real estate is no longer a step-child investment class on Wall Street.”

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