Real Estate Capital Scoreboard® – September, 2017

Chicago, Illinois, September 1, 2017 – Hurricane Harvey along with North Korea’s missile adventures prevent the Fed from instituting any rate hikes soon. As expected, borrowers gain significant advantages by capturing low-priced debt due to such market conditions. Other notable observations include:

Low Inflation: Despite threats of rising rates, key economic indicators show that inflation is at its lowest point of the past two years. Last month the benchmark 10-year treasury bounced about 20 basis points, landing to the lowest levels seen under the current administration.

Short-Term Pricing Indices: LIBOR reform takes the spotlight as far as benchmark pricing indices. British regulators announced the planned removal of the LIBOR Index by 2021. Banks, agencies, insurance companies and other financial institutions have relied upon this index for decades. That said, few lenders are concerned since numerous indices emerge as probable replacements, including the Broad Treasury Repo Financing Rate (BTFR) and the Bank Prime Rate. The more laborious issue focuses on financial institutions to modify documentation that corresponds to the new indices.

New Construction: Many funding sources are flush with cash for making construction loans. However, looming concerns about certain sectors of the commercial real estate market facing overbuilding [mainly multifamily], demand that banks and other construction lenders tighten underwriting standards — or even retrench from such opportunities. Yet the overall state of supply-and-demand is reasonably balanced.    Retail and office sectors are limited to build-to-suit/preleased properties, while industrial development remains healthy, including spec deals.  Now more than ever, new construction opportunities are funded on a very selective basis, generally based upon lower loan-to-cost ratios of 65% or less.

The Real Estate Capital Institute’s Director, John Oharenko, advises, “Even as short-term rates remain very attractive, the pricing gap compared to long-term rates is very tight.” He adds, “It clearly makes sense to explore long-term debt, but with favorable prepayment privileges — the best of both worlds.”

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