February 2009 - The Real Estate Capital Scoreboard
Chicago, Illinois, February 2, 2009 – The realty capital markets remain disruptive, raising stress levels for borrowers with pending maturities. Meanwhile, sellers are unable to generate liquidity as pricing volatility prevails. Smaller transactions are more fluid with recourse requirements much more common as borrowers weigh their options using shorter-term debt. Industry leaders expect minimal positive changes in short-term market dynamics as the financial sector digests unsettling news.
Starting this year, evolving trends are as follows:
• Minimum yield requirements – not spreads over benchmark indices -- dictate loan pricing. Mortgage rates are somewhat stable, as lenders set floors on long-term fixed rate debt in the 6.25-to-7.5%+ range for most conventional properties.
• While rates are within historically favorable limits, continued tightening of other key underwriting parameters restricts meaningful funding volume. More constraints that are conservative include lower valuations, limited leverage, shorter amortization payment schedules, higher debt coverage and substantial escrow/reserve requirements.
• On the public market debt front, CMBS is unlikely to return in the foreseeable future – at least not in the current format. Balance-sheet lenders also struggle with the “denominator” effect, limiting overall funds available for real estate investment, as portfolios are devalued. Furthermore, real estate investments must compete with attractively priced stocks and bonds as astute fund managers hunt among abundant bargains.
• Mezzanine and opportunity funds offer capital, but underwriting is cautious and existing note sales compete for these funds. Pricing on mezz debt starts in the lower-teens.
• Transaction volume flirts with the lowest levels in decades as capital sources wait on the sidelines in hopes of finding the bottom. Substantial pricing discounts are expected throughout 2009, in any case.
• Equity returns are under upward pressure. Overall equity yields for Class A “Core” institutional properties trade from the low to middle teens; “Core Plus” assets trade within the upper-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 8%-to-9%-capitalization-rate range is a popular appraisal benchmark for higher-quality commercial properties in most markets throughout the country. Multifamily properties start at 7% cap rates, although limited trading volume prevents identifying clear and reliable pricing trends.
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.
- Contact Information
- Nat Zvislo
- Research Director
- The Real Estate Capital Institute
- Contact via E-mail
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