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| John Oharenko |
Chicago, IL, May 1, 2023 – The Real Estate Capital Institute® (RECI)
reports real estate capital markets remained calm for the past month as
investors continued absorbing rising debt costs and watching for improving
economic conditions.
In summary, the five
and ten-year about 40 basis points landed about ten basis points higher than at
the beginning of the month.
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But, investors remain on edge. To control
stubborn inflation in the face of tight labor markets, the Fed raised interest
rates nine times during the past year.
Nevertheless, the markets expect the Fed to
raise interest rates a quarter point in the next meeting for the third
conservative time this year.
In addition to dealing with rising mortgage
rates leading to tougher realty underwriting standards (especially much lower
loan-to-value ratios), investors face a challenging lending environment based
on financial institution stability issues.
Smaller and more medium-sized banks lose
depositors, creating a lending vacuum due to the Silicon Valley Bank debacle
and, more recently, the First Republic seizure. As a result, many banks
are retreating or scaling back from real estate lending.
The more active banks focus on existing customer
relationship lending instead of pursuing new funding opportunities.
Despite the difficult realty capital market
conditions, transaction flow continues at much lower levels than in previous
years.
Higher-grade properties selectively trade at premium prices as
buyers justify paying more based on limited supplies, high construction costs,
and cash-flow inflation protection.
For example, ten-year treasuries fall in the
mid-three-percent range, while multifamily capitalization rates average in the
five-percent range – a very tight spread of about 150 basis points reflecting
yield compression.
In
contrast, this spread was more than doubled during the Covid crisis.
In
other words, many investors now accept lower yields via the commercial real
estate sector as an important component of a diverse investment portfolio.
And
compared to Baa bonds, the benchmarks for institutional realty investments,
buyers will accept 50 basis points tighter yield as an inflation premium.
The Real Estate Capital Institute's® director, John
Oharenko, notes: "A wait-and-see attitude prevails among most
investors. Sellers hope for lower rates and better pricing conditions
within a supply-constrained environment. Meanwhile, buyers expect prices
to fall resulting from challenging capital market conditions."
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
The Real Estate Capital Institute®
Chicago, Illinois USA 60622
John Oharenko,
Executive Director
director@reci.com / www.reci.com
