Chicago, Illinois, November 1, 2021 – The Fed recently announced that inflation is slowly returning. For the first time since the pandemic in early 2020, the five-year benchmark interest rate returned to the 100-basis-point-plus threshold during the quarter. Even with inflation fears, lenders battle for funding opportunities, as few other lending categories offer similar yields to real estate loans. With more funding competition, the following realty capital market trends emerge based on the word “higher”:

Higher Prices: As with lending capital, equity funds also represent an insatiable demand for income properties. Borrowers pay up for various real estate projects, as many investors are flush awash with fresh capital. In particular, industrial property values increased by more than twenty-five percent, and apartments climbed by about twenty percent since the pandemic.

Higher Leverage: As commercial real estate prices rose over the past few years, lenders relied on traditional debt coverage ratios (e.g., 125%) to restrict loan proceeds. As a result, such underwriting generated loan amounts of 65% to 70% LTV. Now, some lenders loosen restrictions allowing for lower debt coverage rates. Loan amounts are climbing to as much as 80%, especially for desirable [multifamily, industrial] property loans.

Higher Capital Stacks: Selective capital sources offer more significant portions of funding proceeds, including both debt and equity combinations. Such players contribute as much as 90% to 95% of the capital stack, allowing seasoned borrowers further to maximize their leverage position and cash flow returns.

Mr. John Oharenko, director of The Real Estate Capital Institute, suggests, “For the right property, investors continue to break any glass ceilings for both equity and debt underwriting. There’s simply too much money chasing too few goods.”