Wednesday, February 1, 2012

RECI Finds Low Mortgage Rates Saving Many Cash-Flow Transactions

CHICAGO, IL, Feb.  1, 2012 - The nation's economy is showing signs of improvement in the early part of the year, despite modest income growth and overall weak labor markets.  Key trends show mixed signals including:

*    The Fed's announcement to hold down rates over the next year is part of a continued trend for record-low rates to boost the economy.  During the past month, rates have steadily dropped with overall mortgage rates falling within the 3.25% or greater range for five-year, fixed rate debt and starting a 4% for ten-year debt.

*    Stubbornly low interest rates fuel core-property pricing levels as never seen before. Middle to higher single-digit overall rates of return are now more acceptable for such properties core assets.

*    Even as interest rates are extremely low, mortgage spreads continue to tighten with Agencies leading the way by 5 basis points or more. Mortgage investor demand continues unabated.

*    Insatiable demand for multifamily properties continues to stoke new-construction pipelines to peak levels around many parts of the country, with 2014-15 seen as cautionary years of oversupply.

*    Other than multifamily properties, a new development supply pipeline is trickling across all other segments, helping to assure a more balanced supply demand recovery even in the face of a slowing economy.

*    Office markets still crippled, while industrial properties are modestly improving.  Investors return to these two sectors as yields are more attractive and most see the markets have bottomed-out in the foreseeable future.  Productivity gains drive investors to look for "smart" vs. lower-priced "commodity" space.

*    The retail sector is modestly returning, despite historically high vacancies. Limited new supply and weak demand.  Limited new supply with selective demand assures a delicate balance of modest rent growth supported by a limited recovery. With "value" as the buzzword in the industry, retailers are crossing into different sectors creating more consumer confusion (Malls are offering discount merchandise)

*    Overall real estate capital pricing viewed as a good "relative value" as compared to stocks and bonds.

*    Secondary markets offer more attractive yields, but investor interest is still tepid as job growth and economic uncertainty leave manymarkets behind the hotter coastal areas.

According to Jeanne Peck (top right photo) of the Real Estate Capital Institute, "Mortgage rates continue to be the salvation of most cash-flowing transactions. If
projects don't pencil out at such low rates, little or no hope remains for such assets."

The   Real Estate Capital Institute(r)
3517 West Arthington Street
Chicago, Illinois USA 60624
Jeanne Peck, Research Director

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