 |
| Jeanne Peck |
Chicago, IL - The New Year is a welcome sign with the "Fiscal Cliff"
temporarily averted and real estate investors continuing to borrow money at
near record-low rates. Even as treasury rates rise, lenders aggressively
compete for qualified mortgage funding possibilities. Spreads over
treasuries tighten as more sources jump into the capital market fray.
Cautious optimism fuels lending activities with overall underwriting discipline
still observed along with the following key trends in the annual realty capital
market forecast for 2013:
Steady Rates - Without sounding repetitive, short-term interest rates are expected to be somewhat flat as the Fed steers a straight rate course for the next few years. But longer-term rates will be fickle, riding the wave of inflation. In fact, a 2%-to-2.25% treasury rate would not be a shocking figure.
Balanced Commercial Property Markets - Watch for a better mix of economic
performance for apartment, retail, office, lodging and industrial
properties. During the past five years, multifamily properties had a
lopsided advantage over other commercial properties as oversupply and weak
job growth plagued other assets types to a greater extent. This year,
homeownership is again on the rise with the number of households expected to
double in comparison to the past decade. Furthermore, other property types
are in tight supply with steadily improving cash flow. The net result?
Multifamily ownership is no longer the clearest commercial-property
investment option.
Construction Funds with more dollars - as commercial market fundamentals are
slowly improving in most markets around the country, funding sources are
providing fuller leverage loans, now reaching 70% to 75% based upon costs.
The project exit strategy must be provable within a term of up to three
years to compete the construction or renovation. Floating rate pricing
falls within a range of 225 to 325 bps over Libor.
Cashouts - Yes, cashouts above existing debt -- and even investor total cost
levels - are more acceptable for top-tier projects and owners. Why?
Lenders need to capture more yield by climbing the risk ladder. That said,
cash flow characteristics must be strong along with underwriting benchmarks
such as debt yields, LTVs, etc. Pricing premiums of 25 to 50 bps are common
vs. "standard" pricing.
Higher Leverage via Mezzanine, or "B-Piece" Debt - Numerous fund lenders and
even a few Life Insurance Companies have made higher leverage (up to 75%-85%
LTVs on future value) in mezz financing over the first mortgage for
properties with upside to be captured down the road. These sources have
viewed this debt as an advantage to capture future solid real estate
performing properties.
Risk Sharing - As institutional lenders compete with for larger deals,
"club" deals are back again. Typically $50 million or larger, such loans
comprise a syndicate of various lenders pooling funds together to invest in
larger loans. These club loans are often formulated based upon a
"Pari-Passu" formula of proportional risk and profit sharing. Generally
speaking, pool participants seek 25% or less exposure in any given pool, to
help with loan diversification guidelines.
The Real Estate Capital Institute's Research Director, Jeanne Peck,
predicts, "A recovering economy is a two-edge sword for the mortgage markets
- higher performance at the cost of higher rates. The right balance of cash
flow, mortgage rates and leverage is always a fragile mix."
The Real Estate Capital Institute(r) 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.
Contact:
Jeanne Peck,
The Real Estate Capital Institute(r)
3517 West Arthington Street
Chicago, Illinois USA 60624
No comments:
Post a Comment