More favorable realty capital market conditions predicted by the Real Estate Capital Institute

 

John Oharenko

Chicago, IL – The year ended with an accelerated domestic inflation rate of nearly seven percent, the most significant increase since the summer of 1982.

Even so, the new year shows a continued promise of more favorable realty capital market conditions predicts the Chicago-based Real Estate Capital Institute.

According to John Oharenko, the Real Estate Capital Institute director, "2022 looks to be a bullish year, but investment discipline must be maintained as most opportunities show efficient pricing.

  "Furthermore, inflation fears drive more capital into this sector, so expect values to increase for strongly performing assets."

COVID variants wreak havoc on ownership strategies. Yet, wise investors see fresh opportunities created by such disruptions spanning the past two years.

New revenue streams surface, including work-at-home, new shopping/recreational habits, and creative housing development options.

Based on an abundant supply of relatively affordable capital, funding sources embrace exploring such opportunities.

Even as the Fed promises future rate hikes beginning in March, mortgage pricing remains at historically favorable levels. In particular, rate spreads for various risk profiles stay extremely tight, based on the following parameters:

Floating Rates:  Mostly used for short-term fundings, floating-rate loans fall within the mid-to-higher-two-percent range.

 Lenders continue transitioning from LIBOR to other indices, including the Secured Overnight Finance Rate ("SOFR."), translating to spreads starting at 200 basis points.

 

Fixed Rates:  Permanent debt markets revolve around fixed-rate debt, with longer-term rates of five years or more barely priced higher than floating-rate deals.

Most funding opportunities start in the lower-three-percent range.   That said, five-year pricing rose closer to ten-year loans during the past few months, as inflation fears mount.

 

Debt Yields:  As prices for prime properties rise, CMBS lenders stick to debt yields as low as seven percent for multifamily and ten percent for more challenging assets.

 

 As a result, loan amounts stay in the 65% LTV range. To help borrowers reduce debt service costs, such lenders also offer interest-only payments.

 

Ten-to-Twenty-Basis-Point Rule:  Given tight pricing across the board, 10 to 20 basis point pricing premiums buy higher debt leverage (e.g.,  70-80% LTV), longer-term, tertiary market deals, and other generally more aggressive underwriting parameters than in the past.

 Lenders look for more yield, often competing within such narrow profit margins.

 

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

 john.oharenko@reci.com

 Executive Director

director@reci.com / www.reci.com

^The   Real Estate Capital Institute^®

Chicago, Illinois USA 60622