The Real Estate Capital Scoreboard - March 2009

Chicago, Illinois, March 2, 2009 – As the first quarter winds down, the real estate capital markets are filled with caution and anxiety as lenders crave for market stability. Realty capital markets remain challenged with the following issues in the forefront of discussion:

• Valuation Concerns: Many investors believe that cap rates will return to higher single-digits -- in norm with historical levels. Institutional-grade assets are valued starting at 7% for multifamily properties and 8% for commercial properties. Furthermore, lenders require substantial supporting data (recent comps) to justify lower cap rates. Secondary markets and older properties pricings start at 100 basis points or more with much wider variance.
• Capital Availability/Allocation: Most financial institutions are playing a defensive role, rather than pursuing aggressive growth and funding strategies. Shoring-up balance sheets and shedding unwanted loans and other realty assets remain key priorities. Select sources state that they would like to return to the market by the second quarter and mid-year. Lenders are allocating substantial portions of funds for refinance and rollover, rather than new loan origination.
• Relative-Value Pricing: Attractively priced CMBS debt (Triple-A quality) offers the best investment opportunities for investors preferring to capture the most favorable yields, rather than new origination funds. Such yields are in the lower-double-digit range. As such, mortgage rates are still favorably priced for borrowers -- within the range of 6.5% to 8.5% for conventional properties based on 10-year terms.
• Delinquencies: For the most part, loan delinquencies and defaults are at controllable levels. Retail properties pose the most challenges, as numerous merchants are in either bankruptcy or requesting substantial rent discounts. Co-tenancy issues also raising concerns for further occupancy reductions.
• Tighter Funding Standards: Most lenders are strictly enforcing shorter amortization schedules and wider debt coverage ratios (e.g., 1.25X and 25-year maximum) to restrict proceeds, rather than relying on loan-to-values restrictions as a primary underwriting variable. That said, 55% to 65% is the norm for most institutional-quality, non-multifamily loans. REITs, pension funds and private equity capital players requiring less leverage enjoy excellent rates and terms. Leverage-oriented investors are forced to stay with bank lines, hoping for more favorable funding conditions.
• Maturity Risk: Agencies and many life companies favor longer-term loans in excess of five years as refinance rollover risks are of concern. Meanwhile, banks mitigate such risks by relying upon recourse and substantial funding deposits, often in excess of 10% of the loan amount.
• Large Loan Vacuum: $50 million + loan funding sources are limited to about a half dozen major life companies. Otherwise, lenders must syndicate such loans. Loans under $10 million still offer numerous options including banks, life companies and private capital.
• “Floor” Rates Prevail: While lenders are still quoting fixed-rate loans based on treasury spreads, most loans feature floor-rate minimums. Naturally, floating-rate loans are still quoted floating over Libor, Prime, etc – floors are also imposed on such funding structures.

OBSERVATIONS:

Randal Dawson, a member of the Real Estate Capital Institute Advisory Board declares, “2009 looks to be a year of refinancing and with limited acquisition activity.” Dawson suggests, “Distressed deals will be the norm for most new acquisitions and investors will be overwhelmed with renegotiating overleveraged debt.”



ABOUT US:

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

Real Estate Capital Institute

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