RECI finds the overall economy demonstrates strong resilience, with inflation stubbornly hovering in the 3 percent range.

 

John Oharenko

Chicago, IL –  The Real Estate Capital Institute® (RECI) finds the overall economy demonstrates strong resilience, with inflation stubbornly hovering in the three percent range. 

 

John Oharenko, director of The Real Estate Capital Institute®, advises, “Higher interest rates are here to stay, at least in the short run.  Developers and lenders must find creative ways of making deals work. 

 

He adds, “…Especially since some CRE property fundamentals start showing signs of weakness such as multifamily overbuilding and softening rental pricing trends.”

The Fed thus feels minimal pressure to lower rates soon.   And the bond markets reinforce the trend for higher rates, with 10-year benchmark treasuries rising about 25 basis points during the past month. 

 

  In such an interest-rate environment, real estate capital funding sources search wider and deeper for attractive yields by focusing on the following types of opportunities:

New Construction:  On a selective basis, ground-up construction projects are still in demand, particularly for underserved multifamily markets.   Lenders will review such ventures as sufficient equity exists (e.g., 35% or more of project cost). 

 

 Banks and selective debt funds work with seasoned developers, as sponsorship and liquidity remain key components of construction lending.  Except for the most conservative projects, current pricing for construction loans is commonly funded at 500 basis points over the SOFR index, translating to over 10%.  Higher risk pricing approaches 12% or more.

Bridge Funding:  Besides construction loans, numerous lending sources seek extra yields by funding “light bridge” and construction mini-perm takeout opportunities for projects not stabilized or ready for sale or permanent financing.  Pricing starts in the lower-to-mid teens, based on terms of one to three years.

 

Alternative Property Types:    Most investors focus on multifamily and industrial ventures for “safe” returns.  Alternatively, some creative capital sources pursue yields by tackling more challenging property types where less competition exists, such as office, lodging, and retail deals.  

 

Instead of fully rejecting such opportunities, these capital providers target entrepreneurial owners with substantial cash equity (e.g., 50% or more) based on sound business plans. 

 

In return, such investors require overall yields approaching the mid-teens or more (often higher yields than for construction loans).  Additional fees (e.g., upfront and extension) further boost yields.

 

“Mission” Money:  Funding programs offered by lenders with specific social missions remain favored to a selective group of owners that understand such needs.  As many traditional funding sources stay on the sidelines, mainly government-sponsored enterprises (“GSE”) continue providing liquidity. 

 Popular mission money programs focus on affordable housing.  Although limited in scope, such funding options are extremely attractively priced.  For example, FHA/HUD programs offer 6.5% permanent rates for up to 40-year terms.

The Real Estate Capital Institute® is a volunteer-based research organization that tracks realty rates data for debt and equity yields. 

 

 

CONTACT:

  

John Oharenko

 Executive Director

director@reci.com / www.reci.com

^The   Real Estate Capital Institute^®

Chicago, Illinois USA 60622