The Fed's rate hikes tame capital real estate markets, notes Real Estate Capital Institute

John Oharenko

Chicago, IL,  March 1, 2023 – The Fed's ongoing rate hikes tamed capital markets.  Last month, benchmark five and ten-year treasuries climbed over fifty basis points and stayed inverted by about twenty-five basis points. 

 As markets absorb higher rates, transaction volume slows, and many investors wait for clarity.

 

The Real Estate Capital Institute's® director, John Oharenko, notes, "In today's rising rate environment, debt yields, LTVs, and LTCs remain important restrictions for governing loan proceeds. 

 "However, debt service coverage is the key benchmark given its direct correlation with mortgage rates."

 Commercial real estate investment appetite remains muted but stable, summarized by the following yield discussions: 

 

Base Yields:  Competitive BBB-rated bonds set yield thresholds for investors evaluating real estate opportunities versus "safe" rates (treasuries).  As such, most transactions start with a five-percent-or-higher benchmark.  Liquidity premiums add 25 to 50 basis points as an inflation hedge.  Asset-specific strategies provide additional yield add-ons.

Equity Yields:  Negative leverage yields discourage aggressive equity investments and are mostly limited to "core" apartment and industrial ventures.  Overall yields stay mostly unchanged, hovering in the mid-single-digit cap rate range.  Many longer-term owners enjoy strong cash flows supported by attractive, lower-priced debt obtained within the past decade – resulting in a limited desire to sell such assets. 

 

 Current transactions for desirable properties are generally limited to contractual holding-period expirations or other liquidity calls.  Transitional properties, value-add opportunities, and similar ventures emphasize substantial discounts to replacement costs (e.g., 40% to 60%) rather than going-in yields.

Loan Yields:  Construction loan volume is down to a trickle as labor costs and tight supply restrict new opportunities.  Availability of funds supersedes pricing, which is approaching higher single-digit levels.  As for permanent debt, ten-year non-recourse loans are funded in the 150-to-225-basis-point range over treasuries for desirable property types with proven cash flow. 

 

 Pricing translates to the mid-five-percent-or-more range.  More challenging property types, especially lodging and office assets, reach double-digit pricing.

 

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

 john.oharenko@reci.com

 

^the   Real Estate Capital Institute^®

Chicago, Illinois USA 60622