Chicago, Illinois, October 1, 2019 – This year’s Fed’s second quarter-point rate cut was expected, as markets calmly reacted to the lower pricing. Investors found the hike to yield mixed results. Floating-rate debt clearly benefited, especially prime-based loans. On the other hand, permanent debt, based upon the 10-year benchmark treasury, is only about 10 basis points lower. In fact, this index, along with the 5-year treasury, is over 20 basis points higher than the beginning of last month.
Borrowers continue to enjoy some of the lowest rates within the longest post-war economic boom on record. Mortgage spreads remain unchanged, as the capital markets are flush with cash. Lending discipline remains intact, as banks and other financial institutions maintain underwriting standards including, for example, 7.5% or greater debt yields and leverage ratios of 70% for senior debt.
As floating-rate debt pricing continues benefiting from a stable and low-interest-rate environment, lenders incorporate mortgage language for replacing the LIBOR index over the next couple of years. However, no clear index has emerged yet.
All in all, permanent loans are starting in the lower 3%-range for conservatively leveraged loans based on 10-year terms. Otherwise, most loans are priced in the mid-to-higher-3% range. Rates of 4% (or more) are reserved for structured debt with higher leverage, in tertiary markets, etc.
The Real Estate Capital Institute’s® executive director, John Oharenko, suggests, “As the five and ten-year treasury spreads narrow, inverted yield curve portend a recession is near. However, the economy continues humming along for nearly a decade with no end in sight, at least in the immediate future.”