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| John Oharenko |
Chicago, IL -- The Brexit
whiplash is yet another gift
for domestic realty
markets. Rates plummeted to the lowest level on record
earlier last month, just
above 1.3% for the 10-year benchmark treasury.
The
global flight to financial
safety offered by treasuries proves that
longer-term rates lack any
"true" bottom, but still provide more yield than
available in Japan and
Europe.
The launching of the
second half of the year creates challenges not seen
before: Are low benchmark
yields sustainable and how can commercial mortgage
lenders profitably
compete? The real estate capital markets are responding
with creative solutions,
including:
Competitive Rates: How
"low" is low? Regardless of mortgage spreads over
treasuries, many lenders
require minimal yield floors, of say 3.25%, for
longer-term debt reserved
for the very best deals. In recent years, rate
floors have been trending
downward with 3.5%, 3.75% and 4% floors as
commonplace.
Low rates for alternative
investments and perceived risk/reward
pricing drive down returns
across the entire capital spectrum, so few
options exist. Furthermore, minimal spread premiums are
assessed for
longer-term debt of 15
years or more.
Most lenders use average-life
pricing, resulting in only
10 to 25 basis points more for extending term.
Low Risk Lending: In
exchange for extremely low rates, lenders aggressively
compete for loans with
conservative leverage, where 65% or below is now a
new funding threshold for
most life insurance companies. Banks also chase
such loans, given new
regulations.
More often than not,
traditional lenders
avoid higher leverage
(e.g. 75% or more) as the spread premiums of 50 to 300
basis points are viewed as
too risky relating to principal repayment.
Private, unregulated
mortgage funds pick up the slack by underwriting risk
with a variety of creative
debt/equity options such as Preferred Equity and
Mezzanine debt.
Crossover Funding: The distinction between fixed-rate and
floating-rate
debt is blurrier, with
fewer investors motivated to lock into lower rates
given the current economy.
Minimal risk is associated
with floating-rate
debt, often priced within
a 100 basis points of fixed-rate term loans. To
capture both ends of the
structuring spectrum, lenders offering more
"crossover"
funding options (e.g., fixed-to-float or vice versa).
Stretched Proceeds:
As risk retention rules
introduce more balance-sheet
exposure, lenders gain
comfort with offering additional proceeds during the
loan term to help
borrowers capture more profits, while still staying within
the initial underwriting
guidelines. A win-win for both parties based upon
scalability of performance
for "stretching" loan dollars.
Mr. John Oharenko of the Real Estate Capital Institute(r) states,
"In
summary, rates are at
generational lows, without any foreseeable prospect of
dramatic rate hikes. More of the same for the remainder of the
year... low
leverage dollars attract
ridiculously favorable rates.”
For a complete copy of the company’s news release,
please contact:
Jeanne Peck, Executive
Director
