Chicago, Illinois, April 1, 2022 – The ongoing war in Ukraine, global supply chain issues and inflation continue realigning realty capital markets.   In turn, investors brace for more volatility based on greater economic uncertainty, including the following:

Climbing Rates:  Most believe that the days of historically low interest rates are behind us, as rates rise at the fastest pace in over a decade.  Breaking a three-year record of low-rate policy, the Fed raised rates by a quarter point.  Furthermore, as many as seven interest rate hikes could occur this year.

Inverted Yield Curve:  For the first time since the pandemic, the 5-year and 10-year Treasury yields inverted, opening the possibility of an upcoming recession.  Investors see short-term instability as opposed to long-term yield.

Rate Floors:  Mortgage rate floors return, as lenders fear funding loans at below-market pricing in a rising rate environment.  Common floors range from 3.75% to 4.5%, factoring fifty basis points or more pricing cushions.  Furthermore, lenders include more pricing protection vehicles such as MAC clauses (“material adverse change”), in case market conditions substantially change during the loan process.

Widening Spreads:  In line with rate floors, lenders widen spreads to build in more yield risk.  By the same token, many funding sources, especially smaller financial institutions, move away from fixed-pricing commitments to indexing rates over benchmark indices.  Pricing spread premiums start at 25 basis points.

Valuations:  Even though rates continue climbing, the oversupply of capital favors sellers over buyers.  Sellers have yet to change yield expectations to reflect current conditions, as property transaction markets are usually lagging indicators.  Eventually, downward pricing adjustments will occur, especially for assets offering limited inflation protection, such as a net-lease properties with relatively flat cash flow characteristics.

Mr. John Oharenko, director of The Real Estate Capital Institute®, suggests, “With all the pricing uncertainty, many lenders react by pulling back funding programs, and reducing longer-term mortgage exposure.”