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The Real Estate Capital Scoreboard – August 2008


Chicago, Illinois, August 1, 2008 – The realty capital markets remain surprisingly steady despite volleys of negative news about financial institutions and government-sponsored enterprises. Mortgage spreads are higher, but stable, with funds available for quality loans. Life companies and other balance-sheet lenders continue funding deals based on similar underwriting as seen most of the year.

Mortgage benchmark indices are stable as well. Treasuries are at nearly identical levels from a month ago, although notes and bonds bounced higher by about 30 to 40 basis points. In other words, no major changes in the capital marketplace in either mortgage spreads or corresponding benchmark yields.

Hopefully, the rate stability will set the stage for return of the CMBS lenders in a meaningful way. Select Wall Street firms announced reentering the marketplace by targeting overlooked markets based on funding mortgages in secondary markets, as well as funding more entrepreneurial properties.

Overall rates remain similar to a year ago -- albeit at substantially lower leverage levels. However, more subtle overall trends are evident including the following:

• Funding sources provide competitive rates, but 70% or less of project value remains the norm for mortgage lending.
• Upward pressure on mortgage spreads as most active lenders meet funding targets for 2008. As 2009 approaches, fresh allocations along with some additional CMBS funds should create more liquidity. At the same time, competition from highest quality corporate debt is forcing mortgage yields to rise. Many funding sources demand 25 to 50 basis point premiums as compared to purchasing corporate bonds.
• Mezzanine and opportunity funds ramping up as first mortgage lenders tread with caution. Pricing on mezz debt starts in the lower-teens.
• The large supply of bargain-hunting equity capital is preventing any major pricing discounts from being realized.
• Equity returns are under upward pressure, but few sellers of prime properties show duress and are reluctant to transact below full price as properties continue performing. Overall equity yields for Class A “Core” institutional properties trade from the low to middle teens; “Core Plus” assets trade within the mid-teen range and opportunistic ventures offer returns in excess of 20%.
• Given illiquidity within the equity markets with few comparable trades, numerous lenders are setting valuation parameters for debt fundings. In general, the 7%-to-8%-capitalization-rate range is a popular appraisal benchmark for higher-quality commercial properties in most markets throughout the country. Multifamily properties start at 5.5% cap rates.
• Loans in excess of $50 million per property generally require funding syndications as only a handful of domestic lenders are active in this arena.
• New, speculative projects feature substantial equity of 40% or more of cost. Development deals limited to finest projects with substantial preleasing (70% or more) with established sponsorship.

Jim Postweiler, advisory board member of the Real Estate Capital Institute, suggests “Buyers and sellers are still reluctant to transact, mostly due to stingy debt markets. However signs of improvement are emerging as buyers realize few opportunities for core properties are available.”


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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 realty finance
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 income property
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