CHICAGO, IL-- "March Madness" defines current realty capital markets. While treasury rates barely changed (about 10 basis points), lenders exercise extreme caution in a fog of doubt. Even as rates remain near historical lows, borrowers are baffled by substantially less favorable lending programs including wider spreads, rate floors and overall lower leverage. (Dr. Timothy Riddiough, member, Editorial Advisory Group, Real Estate Capital Institute, photo at right)
In particular, mortgage pricing is one of the key misunderstood variables for sizing loans today. A brief review and update on mortgage pricing are as follows:
* Swap Spread Pricing - Lenders favor swap spreads their movementsaccount for treasury spread volatility. Pricing is protected fromunpredictable spread gyrations as was the case much of last year.
For example, a minimum spreads of in excess of 200 basis points plus a ten-year treasury yields translate to longer-term rates of 6.30% or more.
* "Baseline" Pricing - Obtaining the most competitive quotes 
in the marketplace normally requires calling various lenders and collecting the best quotes. Although this process is still common, lenders readily determine most attractive, risk-free realty debt pricing by checking with the commercial-mortgage securities markets. Today, the highest quality, commercial mortgage securities (e.g., 10 Yr AAA CMBS issues), trade in excess of 6.5% -- the new benchmark for lender rate floors.
in the marketplace normally requires calling various lenders and collecting the best quotes. Although this process is still common, lenders readily determine most attractive, risk-free realty debt pricing by checking with the commercial-mortgage securities markets. Today, the highest quality, commercial mortgage securities (e.g., 10 Yr AAA CMBS issues), trade in excess of 6.5% -- the new benchmark for lender rate floors.* Balance-Sheet Pricing - While Swap-Spread and Baseline pricing models are popular, many funding sources rely on balance-sheet metrics for pricing permanent debt including banks, life companies and agencies. Eacho f these sources have cost-of-funds that aren't necesssarily indexed to bond markets or treasuries.
The Agencies, for example, are able to provide pricing below 6% for longer-term debt - well below traditional sources of capital. Several changes are on the horizon with respect to various pricing formats including:
* More Conservative Underwriting - while interest rates are relatively attractive, continued pressure on funding proceeds will drive lower leverage levels.
* Narrowing Spreads and Pricing - as bond markets gain more stability, narrower spreads are expected.
* Wider Band of Pricing - within recent years, various types of properties (e.g., lodging, multifamily, retail) were priced within a narrow range. As markets readjust, lenders will expect greater pricing premiums for different property risk profiles. More discipline will continue to drive debt pricing and capital market recovery.
Dr. Timothy Riddiough, (photo top right) an Editorial Advisory Group member of theReal Estate Capital Institute, suggests the long-term solution for improving capital market malise is "to educate and protect the demand side by encouraging moderation and safer practices."
ABOUT US:
The Real Estate Capital Institute(r) is a volunteer-based research or
ganization that tracks realty rates data for debt and equity yields. The Institute posts daily and historical benchmark rates including treasuries,bank prime and LIBOR.
ganization that tracks realty rates data for debt and equity yields. The Institute posts daily and historical benchmark rates including treasuries,bank prime and LIBOR. Furthermore, call the Real Estate Capital RateLine at 7RE-CAPITAL (773-227-4825) for hourly rate updates.
CONTACT:
The Real Estate Capital Institute(r)
3517 West Arthington Street
Chicago, Illinois USA 60624
Nat Zvislo,
Research Director
Toll Free : 800-994-RECI (7324)
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