Real Estate Capital Scoreboard® – October, 2017

Chicago, Illinois, October 1, 2017 – The final quarter of 2017 begins with interest rate expectations seen earlier in the year.  Investors are hoping for more normalized conditions less prone to shocks from global politics and natural disasters.  Considering such conditions, realty finance trends revolve around benchmark yields, risk pricing and liquidity, as discussed below.

Benchmark Yields:  With longer term treasuries floating in the 2.25%-or-greater-range. Fed watchers expect inflation at about the same level, approximately 2.5%.  Many hope the economy will run along a steady pace without any inflation fuel.  The Fed’s objective focuses on reducing the $4.5 trillion balance, with as many as four quarter-point rate hikes during the next two years.  Consequently, mortgage pricing expected to steadily climb as well.

Risk Pricing:  Overall mortgage pricing remains tight, as a wide spectrum of lenders compete for long-term permanent loans within a historically narrow range of 3.5% to 5%+ for funding traditional property types.  Higher-risk, value-add perm loans generate pricing still below the double-digit range.  Mezzanine, preferred equity and other “stretch” debt is freely available, directly competing with lower-yielding equity returns – often in the higher-single-digit to lower-teens range.

Liquidity:  For any reasonable quality cash-flowing asset, funds are readily available from multiple sources.  With realty capital liquidity at peak levels, agencies, LifeCos, banks, conduits and debt funds abound. Agencies demand loans as year-end goals need to be met, so multifamily borrowers enjoy the best loan terms of any asset class.  LifeCos comfortably meet funding objectives, with additional capital allocations available for next year.  However, the need to “reach” for deals is less prevalent for this year, as 2018 goals will be announced.  Banks cautiously monitor HVCRE requirements, but still need deal flow for profitability. Wall Street tightens spreads as to more selective buyer pools seek higher-quality offerings.  Debt funds lurk at the upper end of the yield curve, taking on construction and value-creation transactions.

Mr. John Oharenko, Director of The Real Estate Capital Institute®, suggests, “While expectations are for more Fed rate hikes during the next two years, the need to do so is limited.  Global uncertainly and other uncontrollable events drive debt markets more than economic policies.”

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