Real Estate Capital Scoreboard® – November, 2019

Chicago, Illinois, November 1, 2019 – The Fed cut its benchmark rate a quarter point just before the end of October, the third such drop this year. As agency lenders and other traditional sources reach their mortgage lending limits, Wall Street, institutional and private capital players expand market share. Other important trends to watch include:

Slowing Global Economy: The domestic economy maintains steady and favorable growth patterns other markets around the world witness some fatigue. Japan continues to stagnate, while Australia dropped its lending rates to the lowest levels in history. The Eurozone demonstrates slower industrial output. Lastly, the US/China trade war provides further pressure for low growth. As such, global demand should continue for US treasuries as safe-haven investments, translating to favorable long-term mortgage rates in the foreseeable future.

Diversified Funding Sources: The Real Estate Investment Trust (“REIT”) lending format, in particular, is now an important source of providing liquidity for housing, since Freddie Mac and Fannie Mae’s role become more limited. These lenders are issuing more private label mortgage bonds that include blended agency debt. Expect other private, public and institutional investors to offer more programs based on changing risk/yield profiles.

Pricing Uniformity: Most floating and fixed-rate debt offerings are priced within the 3%-to-4.5% range, indicating lenders are highly competitive, yet need to maintain minimum yields. Few borrowers make realty debt decisions solely based on pricing. Other terms such as interest-only payments, extended amortization, reduced (or eliminated) recourse provisions, leverage and prepayment flexibility dominate negotiations.

Regulatory Environment: Since the Great Recession, various federal banking regulations tamed aggressive underwriting practices for construction and conduit loans. More typical leverage is 65% of value, as banks focus on credit quality over other underwriting benchmarks such as leverage. As banks take a more active roles in leading conduit debt offerings, less risky loans prevail. Lastly, construction loans are more carefully structured as select markets show signs of supply/demand imbalance for new developments. On the other end of the regulatory spectrum, FHA/HUD underwriting requirements are being streamlined to help provide more competitive terms.

Mr. John Oharenko, executive director of Real Estate Capital Institute’s®, recommends, “More diverse funding sources entering the market help maintain a healthy balance and overall better liquidity. That said, traditional sources such as agencies, life companies and banks still capture their share of lending volume.”

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