Repricing in the real estate capital markets expected by next year, RECI predicts

 

John Oharenko

Chicago, IL – The Real Estate Capital Institute® reports rates in the real  estate capital markets remain at the peak levels of recent history.  

 

Investors on all sides of the real estate capital stack continue to look to policymakers for interest rate guidance, as the Fed kept rates unchanged in September. 

  While few experts expect dramatic changes in mortgage market conditions soon, many are still baffled by current investment conditions that defy conventional wisdom, including the following: 

 

Robust Housing Market:  Interest rates for homebuyers have more than doubled since the beginning of 2022, starting in the higher-six-percent range.  Yet housing prices hardly reflect any distress, as a shortage of for-sale dwellings plagues numerous markets.  Under such conditions, more buyers are squeezed out of the affordable housing market, forced to stay as long-term renters vs. homeowners.  As a result, multifamily properties continue enjoying healthy single-digit rent growth.

 New Construction Dilemma:  High construction costs and expensive financing force developers to continuously reprice deals.  During high-interest rate cycles, land values are one of the most impacted components of new construction ventures.  Few landowners holding desirable parcels will drop prices even as soft and hard costs rise.  In some cases, land costs approach as much as half the total project costs, far out of line with the more typical 15%-to-20% ratio that many developers consider more "normal."

 Negative Leverage:  Among the more controversial funding strategies in today's volatile market is negative leverage.  Yield spreads of as much as 500 basis points between debt costs and equity returns indicate that some investors believe rent growth, blended with dropping interest rates, will justify such funding strategies over the projected holding periods.

Inverted Yield Curve:  Over the past two years, the inverted yield curve confused pricing over benchmark yields.  The 10-year treasury long serves as the investment denominator for determining risk and reward tolerance priced above this safe rate.  However, the five-year treasury now acts as the new benchmark.  As a result, many lenders favor shorter-term funding opportunities in contrast to longer-term permanent debt investments.

 

Director of the Real Estate Capital Institute®, John Oharenko, believes "The real estate capital markets, in many ways, seem to be functioning upside-down.  Repricing is the real answer.  This phenomenon is expected to occur next year when more properties are refinanced or sold based on trades reflecting true debt costs. 

 

 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.  

 

^The   Real Estate Capital Institute^®

Chicago, Illinois USA 60622

 

CONTACT:

 

John Oharenko, Executive Director

director@reci.com / www.reci.com