Chicago, Illinois, May 1, 2022 – April represented one of the most volatile months in the stock markets, with drops of 1000 points in a single day. Under such conditions, major benchmark rates continued climbing throughout the month as investors absorbed more negative news about inflation. The 5-year and 10-year notes rose about 60 basis points. The 5-year note also maintained an inverted yield curve over the 10-year note, although by a narrower margin. That said, many economists fear a recession should Fed rates approach 5% to stifle inflation.
Lenders still maintain loan underwriting discipline, despite the abundance of capital. Pricing varies, but 4% to 5% falls within the most common fixed-rate debt range. Floating rate pricing starts at 250 basis points over select indices, increasing to 500 basis points for more entrepreneurial ventures. Debt yields range 7% to 10%+ restricting higher leverage debt, even with aggressive equity pricing. Loan-to-value stays within the 75% or less range. However, up to 85% is available under pref equity programs. Debt Service Coverage Ratios (DSCR) start at 110% for projects with provable cash flow increases, but 120% remains the standard. Amortization schedules apply as underwriting restrictions, typically with 30-year terms. Yet, lenders favor interest-only structures to stay competitive.
The Director of The Real Estate Capital Institute®, John Oharenko, notes, “Inflation takes center stage with investors based on ongoing expectations of higher rates.”