"Cash in" vs. "cash out" refinancing is new theme for debt-seeking property owners, notes RECI

John Oharenko

 

Chicago, IL – The Fed's quarter-point interest rate hike earlier last month marks the tenth-rate hike since the start of 2022, observes The Real Estate Capital Institute® (RECI).

And more negative news about slowing housing markets, lower rent increases, and the ongoing malaise plaguing the office markets. 

Yet, real estate capital markets continue functioning, albeit at a slower pace based on the following debt underwriting trends:

Loan Proceeds:   Debt service coverage ("DCR") remains one of the most important underwriting variables due to the extraordinarily high mortgage rates compared to recent years. 

 

The new theme for property owners seeking debt focuses on "cash in" vs. "cash out" refinancing.   Said another way, borrowers must contribute additional cash to pay off an existing loan. 

 

The goal is to recapitalize overleveraged debt based on using debt service requirements.   Mortgage rates have often doubled compared to the original loan underwriting structured during the past decade.

 

Floating Rate:  Floating rate deals now price at 200 to 300 [or more] basis points over SOFR, translating to 7% or more.  Higher rates for value-add and higher-leverage (>55% LTC) are priced over 8%. 

 

 In particular, construction loans are difficult to find based on the shortage of active lenders in the market, mostly banks.    Regulators heavily monitor this funding sector.  And since banks carry about half of all commercial mortgage maturities which mature this year, burdening on stressing balance sheets.

Fixed Rate:  During the month, five-year benchmark rates climbed nearly fifty basis points, while the 10-year rate increased about as much. 

 

The best mortgage rates start in the low-5% interest rates for five-year debt.  Longer-term debt is priced in the 6%-or-more.  Life companies have become much more competitive in the shorter-term, fixed-rate debt, providing financing options traditionally led by banks, of which many are sidelined.

The Real Estate Capital Institute director John Oharenko predicts, "As more lenders remain shy about offering competitive debt terms, seller-financing will gain momentum for closing sales transactions."

 

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 and bank prime.  

 

 

CONTACT:

 

John Oharenko, Executive Director

director@reci.com / www.reci.com

 

^The   Real Estate Capital Institute^®

Chicago, Illinois USA 60622