Done Deals: The Real Estate Capital Institute® reports long-term mortgage rates continue to improve for borrowers

Saturday, June 1, 2024

The Real Estate Capital Institute® reports long-term mortgage rates continue to improve for borrowers

John Oharenko

Chicago, IL, June 1, 2024 – The Real Estate Capital Institute® notes that with unchanged Fed rates, benchmark 10-year treasuries steadily declined throughout May, settling at about 4.5% vs. April's peak of 4.75%.

Furthermore, CPI decreased this year for the first time to 3.4%, leading to the following realty capital market questions:

Lower Inflation Expectations? Bullish realty investors feel that a gentle landing is on the horizon. The labor market weakened as inflation cooled again and consumer spending fell. Conversely, more pessimistic investors believe that April's CPI figure hardly changed and is not within the Fed's 2% inflation benchmark.

Lower Rates? Long-term mortgage rates continue to improve for borrowers. Earlier last month, agencies tightened spreads by 20 to 30 basis points for fixed-rate, ten-year, fixed-rate permanent loans. Rates are in the 5.5% to 6.5% range based upon leverage ranges of 55% to 80% LTV.

However, short-term, floating-rate loans create punishing pricing conditions for borrowers seeking funding strategies such as construction or asset repositioning. Floating rate loans are priced at 7%, or more often above 8%, resulting in expensive debt.

Asset Class Bifurcation? The commercial real estate markets are very bifurcated, so cash flow growth and asset appreciation can be elusive. Multifamily rental housing supply remains constricted, as construction costs and limited development opportunities exist. The new supply of industrial properties is tapering off based on more stabilized demand. Retail properties enjoy a resurgence. Best-in-class assets trade in these property types within the 5% to 6% capitalization rate range.

On the other hand, office properties, particularly older vintage, trade at discounts of 70% or more compared to a few years ago without much hope for recovery. Equity yield may be as high as 25% for entrepreneurial office ventures.

John Oharenko, Director of The Real Estate Capital Institute®, , advises, "Despite unfavorable mortgage rates, institutional quality realty assets are always in high demand due to a very sparse supply, hardly allowing for any discounted pricing.

"On the other hand, distressed assets, such as older office properties, still haven't hit bottom."