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The Real Estate Capital Scoreboard™ - August 2007


Chicago, Illinois, August 1, 2007 – Realty capital markets are on a wild roller coaster ride as rising mortgage default expectations haunt investors and borrowers alike. Treasury note yield plummeted by nearly 40 basis points during the last couple of weeks. At the same time, mortgage spreads have radically widened by as much as 75 basis points as investors continue reassessing mortgage pricing dynamics.

Until recently, borrowers enjoyed what seemed to be an unlimited supply of low-cost funds for fueling highly leveraged deals. Moreover, while debt performance benchmarks are within acceptable levels for commercial mortgage-backed securities, investors worry about sub-prime debt housing woes trickling down to commercial markets. Wall Street shows a greater disdain for risky debt as demonstrated by the stock market plunge of about five percent last month.

Current market volatility creates new challenges. Borrowers should expect more conservative underwriting in the near future. Notable changes include: (1) less capital sources (particularly securitized debt lenders); (2) tighter underwriting with less interest-only payment formats and a return to more traditional leverage levels of 75% or less; (3) a flight to higher quality properties; (4) reduced supplemental leverage programs (e.g., mezzanine, preferred equity); and (5) fewer early-rate-lock commitments. In the meantime, many lenders are temporarily retreating from the mortgage market and taking a “wait and see” attitude to determine where mortgage spreads will settle.

Jim Postweiler, a member of The Real Estate Capital Institute’s advisory board, notes the following trends relating to institutional equity markets:

· Volatility in the debt markets and the resulting increase in spreads are affecting pricing for many leveraged buyers. Transactions with near-term rollover, vacancy or lower credit are being re-priced due to more conservative loan underwriting.

· Conversely, replacement cost increases and expected rent spikes help maintain and justify further price increases. Unless a property is in a very desirable market backed by high-quality cash flow, sellers should expect more challenging price negotiations than in recent years.


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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