Monday, August 1, 2016

Real Estate Capital Institute Notes Low-Yielding U.S. Treasuries Still Provides More Yield Than in Japan and Europe

John Oharenko
Chicago, IL -- The Brexit whiplash is yet another gift
for domestic realty markets. Rates plummeted to the lowest level on record
earlier last month, just above 1.3% for the 10-year benchmark treasury.  The
global flight to financial safety offered by treasuries proves that
longer-term rates lack any "true" bottom, but still provide more yield than
available in Japan and Europe.

The launching of the second half of the year creates challenges not seen
before: Are low benchmark yields sustainable and how can commercial mortgage
lenders profitably compete? The real estate capital markets are responding
with creative solutions, including:

Competitive Rates: How "low" is low? Regardless of mortgage spreads over
treasuries, many lenders require minimal yield floors, of say 3.25%, for
longer-term debt reserved for the very best deals. In recent years, rate
floors have been trending downward with 3.5%, 3.75% and 4% floors as

Low rates for alternative investments and perceived risk/reward
pricing drive down returns across the entire capital spectrum, so few
options exist.  Furthermore, minimal spread premiums are assessed for
longer-term debt of 15 years or more.

 Most lenders use average-life
pricing, resulting in only 10 to 25 basis points more for extending term.
Low Risk Lending: In exchange for extremely low rates, lenders aggressively
compete for loans with conservative leverage, where 65% or below is now a
new funding threshold for most life insurance companies. Banks also chase
such loans, given new regulations. 

More often than not, traditional lenders
avoid higher leverage (e.g. 75% or more) as the spread premiums of 50 to 300
basis points are viewed as too risky relating to principal repayment.
Private, unregulated mortgage funds pick up the slack by underwriting risk
with a variety of creative debt/equity options such as Preferred Equity and
Mezzanine debt.

Crossover Funding:  The distinction between fixed-rate and floating-rate
debt is blurrier, with fewer investors motivated to lock into lower rates
given the current economy.

Minimal risk is associated with floating-rate
debt, often priced within a 100 basis points of fixed-rate term loans. To
capture both ends of the structuring spectrum, lenders offering more
"crossover" funding options (e.g., fixed-to-float or vice versa).
Stretched Proceeds: 

As risk retention rules introduce more balance-sheet
exposure, lenders gain comfort with offering additional proceeds during the
loan term to help borrowers capture more profits, while still staying within
the initial underwriting guidelines. A win-win for both parties based upon
scalability of performance for "stretching" loan dollars.

Mr. John Oharenko of the Real Estate Capital Institute(r) states, "In
summary, rates are at generational lows, without any foreseeable prospect of
dramatic rate hikes.  More of the same for the remainder of the year... low
leverage dollars attract ridiculously favorable rates.”

For a complete copy of the company’s news release, please contact:

Jeanne Peck, Executive Director


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