Chicago, IL April 2, 2012 – Continued signs of economic improvement bode well for real estate capital markets. The number of lenders entering the marketplace is sprouting as fast as record temperatures have been rising during this spring season.
“Hot” market trends include:
No doubt, apartments are the poster children of commercial realty markets. Well over 10% growth in new construction starts exists within this sector as vacancy rates remain in the 5% range nationally.
Over $30 billion of securitized mortgage bonds are expected to be issued this year, a mild improvement over last year. CMBS volume will still be only about 10% to 15% of the peak volume witnessed five years earlier. Overbuilding concerns might surface within two years or so, in tandem with new supply and recovering housing markets.
As Core and Core Plus assets reach stratospheric prices, investors are moving into lower-tier properties and to secondary markets for greater value/yield plays. They still favor core properties as inflation hedges, given improving office, retail and industrial leasing fundamentals.
Investors are taking note of rising utility prices taking toll on cash flow performance, portending more expense increases. Rising water and power bills chip away at the bottom line. Additionally, municipal infrastructure costs creep upwards while tax revenues stay flat or decline in many areas causing concern about future property tax bills a few years in the future.
As for current pricing, while treasuries have slightly risen, mortgage spreads over treasuries continue to tighten as lenders see few alternative investments with similar yield and risk profiles when compared to the bond market.
Overall, mortgage spreads over treasuries fall within the 180 to 260 basis point range for most types of institutional-quality properties.
Bank are particularly active for term loans of five year or less, while life insurance companies aggressively compete on lower leverage loans, as well as those properties that are in the process of stabilizing (e.g., forward-delivery loans). Floating rates are nominal, ranging from just below 3% to 5%.
CMBS lenders carve out a niche in funding B and C grade assets, with rates hovering below 5% for 10-year funds based upon full leverage.
Agency lenders and the FHA dominate with the lowest rates in the marketplace, but restricted to multifamily assets. 3.25% to 4.25% is the general rate range for fixed-rate debt of varying terms.
Ms. Jeanne Peck (top right photo), research director for at the Real Estate Capital Institute, comments, “With the mortgage conduits back in the market, nearly at full swing, more competitive spreads and terms resurface-in some cases between life company lenders and CMBS lenders!”
She adds, “It’s a great time to be a borrower for most types of cash-flowing properties.”
The Real Estate Capital Institute® is a volunteer-based research organization 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.
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