 |
| John Oharenko |
Chicago, IL, June 2, 2020 – The Real Estate Capital
Institute (RECI) reports this year continues with more surprises, as civil
unrest overtakes COVID-19 worries.
Communities feel financial and
emotional pains as federal, state, and local governments continue operating in
crisis mode.
The
commercial real estate industry, too, moves to crisis mode even as businesses
reopen. In
the capital markets, funding sources creatively cooperate with property owners
to find solutions for returning to more normal conditions.
However, recent events bring more permanent
changes to the markets, including the following underwriting trends emphasizing
the word "minimum":
Minimum
Pricing: Lenders mostly ignore pricing indices
tied to treasuries, as meager benchmark rates hardly reflect current
risk/reward profiles. Today's pricing for prime longer-term debt dips into the
low-3% range. However, most loans fall within the 3.5% to 4.5% range,
depending upon property type and risk profile.
Minimum
Leverage: For new-origination loans, fifty to sixty percent
loan-to-values accurately demonstrate lenders' reluctance to take loan risk
during such uncertain conditions. Higher equity requirements remain the
best tools for risk mitigation.
Minimum
Development Risk: New construction projects stall as investors
monitor highly volatile market conditions based on existing development
pipelines and changing consumer demands. As a result, more discounting
occurs on construction costs; in some cases, by as much as fifteen
percent. Also, more cooperation exists between municipalities and
developers, as problem-solving takes the forefront of capital market
decision-making.
Minimum
Threshold Safety Requirements: Lenders,
investors, authorities, premisists, and nearly everyone involved with
operational property decisions now focus on occupant physical safety and health
conditions. Professional operations require outlining how such issues are
addressed from property to property.
Minimum
Contact: Investors focus on providing premises with social distance
as an essential physical design benefit. Expect more space per person,
and at highly competitive pricing given the overall malaise of office, retail,
lodging, and other "non-essential" property types.
The
Real Estate Capital Institute's® director, John Oharenko, adds,
"It's back to basics of the industry. While financial performance
remains a priority, life-safety issues rightfully take the spotlight in today's
commercial realty markets."
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
john.oharenko@reci.com
The Real Estate Capital Institute®
Chicago, Illinois USA 60622
