The Real Estate Capital Scoreboard – October 2007
Chicago, Illinois – October 1, 2007 - After two months of instability, the real estate capital markets are beginning to show signs of leveling off. As mortgage pricing and loan underwriting are substantially more conservative than during the first half of the year, lenders and borrowers alike are readjusting funding expectations to match current conditions.
Although the subprime market has been the focus of many financial market analysts, floating-rate, short-term debt dramatically fluctuated throughout the month. LIBOR, in particular, bounced about 50 basis points after staying stable most of the year. As a result, the following trends are observed:
1. Fed’s action of 9/18/07 calmed realty capital markets as variable rate debt settled about 20 basis point below a month ago (after increasing over 50 bps during early September).
2. Lenders are quoting deals on a day-by-day basis. Cash management and accurate pricing amid high volatility are key concerns among funding sources.
3. Mortgage conduits (CMBS loans) reflect the higher end of the market with pricing of approximately 170 basis points or more.
4. Life insurance companies redirect funding allocations towards higher-quality, lower leverage properties as conduits retreat from pricing transactions below 170 basis points.
5. Agencies are extremely active (FHA, FNMA and Freddie Mac), offering the most competitive terms in the marketplace for full-leverage (e.g., 80% LTV), immediate-funding, multifamily properties.
6. Banks and other floating-rate lenders grapple with pricing over LIBOR or treasuries. Borrowers requesting more flexibility in structuring floating-rate debt.
7. Active funding sources are rapidly depleting allocations as borrowers scramble to capture attractively priced debt, mostly from life companies.
8. As funds are more limited, lenders will occasionally dip below $10 million to capture more yield and round out their mortgage portfolios.
9. Equity markets still in the middle of a price correction based on changing debt conditions. Many high-quality, institutional properties are pulled off the market as borrowers and see improving cash flow fundamentals are, even with more expensive and conservative priced debt.
According to John Oharenko, and advisory board member of the Real Estate Capital Institute, “We’re seeing a major shift in lender psychology.” He adds, “After more than a decade of borrower-friendly funding, lenders are gaining the upper hand in transaction negotiations.”
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. Furthermore, call the Real Estate Capital RateLine at 7RE-CAPITAL (773-227-4825) for hourly rate updates.
- Contact Information
- Nat Zvislo
- Research Director
- The Real Estate Capital Institute
- Contact via E-mail
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