The Real Estate Capital Scoreboard – February, 2008
Chicago, Illinois, February 1, 2008 – Given the state of the market with gyrating interest rates, lenders are cautiously funding loans at well below last year’s record volume levels. And while benchmark indices (e.g., Treasuries, Libor) plummeted throughout January, many lenders are requiring wider spread premiums to compensate for illiquidity and greater risk-pricing volatility. Furthermore, rate “floors” are common, with a 6%+/– emerging as a popular threshold. While the market is in a state of flux, the following debt trends are observed:
• Mortgage funds are readily available, although lenders are much more selective
• Life insurance companies and banks are the backbone sources for most permanent and floating-rate debt
• CMBS/conduit programs are steadily recovering, cautiously funding loans with wider spreads of at least 300 basis points or more over comparable-term treasuries
• The mortgage constant and debt service coverage ratio guide mortgage underwriting standards, not purchase price, as lenders are reluctant to accept valuations in “overpriced” markets during the past few years
• Lower level of investment grade CMBS paper is relatively illiquid (AA to BBB tranches)
The same story translates to the equity markets which are unstable as sellers and buyers readjust pricing expectations in light of rapidly changing debt markets:
• Class A properties maintaining values as institutional owners are reluctant to sell well-performing “core” assets
• Buyers flocking to invest in major markets in a continued trend of “flight to quality”
• 10% to 15% lower prices evolving for Class-B and -C properties, particularly in secondary markets
• Multifamily, office and industrial properties in demand; retail assets more scrutinized in light of eroding consumer confidence
• Vacant land transactions extremely limited and tempered by new construction costs, stringent pre-leasing requirements and investor caution
Jim Postweiler, a member of the Editorial Advisory Group of the Real Estate Capital Institute, emphasizes, “Although we have seen a shift in pricing models resulting mostly from lender underwriting, reliability of buyer performance has emerged as a top priority creating opportunity for groups that follow through on purchases.”
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.
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- Nat Zvislo
- Research Director
- The Real Estate Capital Institute®
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