The Real Estate Capital Scoreboard® – October 2022

Chicago, Illinois, October 1, 2022 –  September delivered challenging news to the real estate capital markets.  A strong dollar, return to domestic manufacturing, and low unemployment kept the Fed on edge about taming the economy and triggering more interest rate hikes, leading to a 75-basis-point increase.  The US stock market officially reached a recession.  Also, multifamily investors witnessed apartment rents dropping from record highs across the country for the first time in nearly two years.  Conversely, millions of apartment dwellers found financial relief after suffering a barrage of rent hikes during the pandemic.

In addition to interest rate hikes and softening demand, debt investors require higher mortgage spreads to cover the uncertain pricing environment.  Mortgage rates have more than doubled since the beginning of the year, reaching the highest levels since 2007.  Investors are preparing for more rate hikes in the coming months, showing signs of hawkish rate expectatins.

Given the expectations of higher rates, overall mortgage pricing favors longer-term debt of ten years or more, as the yield curve remains inverted.    Permanent, fixed-rate debt for ten-year mortgages falls within the 120 to 200 basis point range over benchmark treasuries.  Within this range, 80% LTV loans with a minimum debt service coverage of 1.25X typically cost 40 to 50 basis points more than 65% LTV loans for apartment properties.  Overall rates translate to about 5% to 6%.   Also, lenders maintain similar underwriting parameters for shorter-term debt, with comparable-term treasuries hovering approximately ten to twenty basis points higher than longer-term debt.

Mr. John Oharenko, the Real Estate Capital Institute’s® director, recommends, “this fall’s real estate capital markets remain in flux, as investors attempt to understand the Fed’s plan for taming inflation.”

The Real Estate Capital Scoreboard®

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