Low Mortgage Rates Here to Stay, Predicts The Real Estate Capital Institute®

John Oharenko

 Chicago, IL, April 1, 2019 – The Fed’s announcement to keep rates unchanged sent 10-year treasuries to the lowest levels since the end of 2017.  Discussions of any rate hikes this year are unlikely. 

Fed projects one hike for next year, and a rate cut may be justified should the economy start losing momentum.  For the foreseeable future, low mortgage rates are here to stay, as a strong job market is tempered by cautious consumer spending and reduced business investments. 

The executive director of The Real Estate Capital Institute®, John Oharenko, summarizes current financing conditions by noting, “The commercial realty markets feel flat, in step with the yield curve. Not too much up or down movement, just a little sideways.”

Noteworthy commercial mortgage pricing trends based upon leverage, term and rate structure are noted as follows:

Leverage:  Pricing on lower leverage debt of, say 50%, is extremely attractive, starting at 140 to 160 basis points over longer-term treasuries, and even lower for ‘prime’ deals.  Stepping up to 70%, spreads climb by nearly 50 basis points.   Full leverage loans of up to 80% (typically layered with Mezz debt), include another 50 to 75 basis points.  All in all, permanent debt featuring a ten-year term is generally priced in the 4%-to-5.25% range.  Additional 15-20 basis points discounts/premiums available depending upon project leverage and quality.

Term:  The ten-year term reigns as the benchmark timeline for permanent debt.  Given yield curve flatness, five-year debt is priced only 10 to 20 basis points lower.  On the other end of the spectrum, twenty-year debt is about 20 to 25 basis points higher.  Term elasticity is minimal, so longer-term debt remains desirable.

Rate Structure:  Adjustable-rate loans are priced within the 4%-to-5% range, gravitating towards the middle-range.  Similar to term funding dynamics, rate structure pricing is nearly inelastic, as adjustable and fixed-rate debt rates are very similar.  Also, mortgage spreads typically widen when treasuries significantly drop, as occurred last month.  Due to the substantial amount of capital chasing a limited amount of real estate projects, lenders are keeping spreads tight, or unchanged, to stay competitive in the market despite lower treasuries.

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.  

CONTACT:

 John Oharenko, Executive Director

director@reci.com / www.reci.com

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