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| John Oharenko |
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
john.oharenko@reci.com
the Real Estate Capital Institute®
Chicago,
Illinois USA 60622
