Done Deals: February Was Kind to Borrowers Seeking Debt

Saturday, March 2, 2013

February Was Kind to Borrowers Seeking Debt

Jeanne Peck

Chicago, IL, March 2, 2013 - The shortest month of the year closed with overall improved real estate capital market conditions -- at least for borrowers seeking debt. Treasuries dropped about 15 basis points and mortgage spreads compressed, resulting in nearly 25 basis points lower rates.

Renewed fierce competition among funding sources negates any clear differentiation between various types of lenders today.

Banks, lifecompanies, Wall Street, agencies and private capital sources are all bidding within very tight underwriting ranges for higher-quality assets and creating new lending programs to fit almost every client preference. Floating rate loans enjoy historically low pricing and benchmark LIBOR and bank prime rates remain flat for more than a year.

That said, any meaningful pricing discussions are within the realm of the fixed-rate debt.

Based upon term, current pricing ranges for multifamily, office, retail and industrial properties requiring fixed-rate debt and assuming typical leverage levels of much as 75% are as follows:

* Five-year term: 2.75% to 3.5%, with banks prevailing in this term.Often times, such loans are structured using swap contracts.

* Ten-year term: 3.75% to 4.5% with life companies and conduits leading the pack. Select banks offer such terms to preferred customers.Agencies still lead the market for apartment deals.

With so much competition on pricing at levels many funding sources find unprofitable, the capital markets are reevaluating risk spectrums. In search of yield, more lenders find themselves targeting secondary markets, higher leverage and non-traditional property types.

For example, an un-flagged hotel in a secondary market will be priced at least 75 to 100 basis points than typical loans. All in all, such risk premiums are far much more compressed than in any time since the Great Recession when pricing was double to triple of today's levels. In fact, even high-risk, short-term "situational" debt yields are moving into the higher single-digit yield range in many cases.