Chicago, Illinois, April 1, 2021 – The economy continues on the recovery path, as the new administration plans to vaccinate most of the nation by this summer. The commercial real estate industry rides this wave of improvement based on the following significant trends:
Rising Rates: Since the beginning of the year, the benchmark 10-year treasury climbed about three-quarters of a percent. Last month accounted for about a third of the increase, as investors witness a quicker recovering economy. While index rates rise, lenders attempt to maintain spreads, but capital surplus leads to compressed profits for funding permanent fixed-rate debt. On the other hand, expect floating rates to remain low, as the Fed maintains lower, short-term yields for the next couple of years.
Housing Demand Unabated: Lack of available single-family housing at affordable prices boosts demand for multifamily. Many markets in the nation witnessed pricing hikes approaching twenty percent during the past year – the most extraordinary surge since the Great Recession.
Spotty Recovery: Lodging, retail, and office property types still lag. That said, limited-service, neighborhood grocery-anchored centers, and suburban offices show signs of resurgence. Industrial remains “hot,” even with record amounts of new construction. And as always, credit-tenant properties across various sectors attract premium prices.
Proforma Underwriting: In select instances, lenders return to proforma underwriting for recovering properties (e.g., hotels) if cash flows show trending increases. Funding sources will consider profitability thresholds witnessed before the pandemic for establishing financial performance limits.
According to John Oharenko of The Real Estate Capital Institute, “The economic rebound moves forward with more momentum. And even with rising rates, overall debt pricing appears favorable with mortgages funded in the lower-three-to-four-percent range.”