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The Real Estate Capital Scoreboard™ – September 2007


Chicago, Illinois, September 4, 2007 – The end of summer season closed with tremendous volatility and uncertainty. Treasuries, LIBOR and mortgage spreads bounced around like ricocheting bullets, by as much as half a point. Fed’s cash injection helped calm markets in mid-August. Doom-and-gloom still prevails. Yet many see the real estate capital markets as returning to more “normal” levels of three years ago. Underwriting standards, leverage and pricing are approaching more typical historical levels.
Key real estate capital market highlights and trends are as follows:

• Mortgage Patrols: Frequent changes in market conditions (almost daily), require vigilant communications with capital sources to capture lending program changes and determine which sources are active.
• Rate Premiums: First-mortgage lenders demand more yield to compensate for uncertainty. Fixed-rate mortgages spreads increased by 50 to 75 basis points, and in many cases even higher. Floating-rate loans climbed by about 30 basis points or more. As for higher-risk funds (where available and in scarce supply), including mezzanine and participating equity funds, premiums are 200 basis or more with tremendous pricing differentials.
• Conservative Underwriting: Along with higher premiums, less is more as far as leverage. Less proceeds, borrower negotiations, interest-only funds are a few examples translating to more chances of a loan closing.
• Fewer Sources: Some lenders pulled out of the markets, while others are backlogged with more funding requests. Borrowers are still getting accustomed to this environment which is clearly swinging in favor of lenders – a trend not seen since the mid-1990s.
• Relationships Count: Borrowers with strong track records and loyalty are rewarded with liquidity. Lenders, especially those with balance-sheet programs, will still be more aggressive with repeat customers.

According to John Oharenko, member of the Institute’s Advisory Board, “We’re seeing more balance between life companies, banks and conduit lenders.” He adds. “During the last three years the CMBS markets completely dominated nearly all of the capital markets and Wall Street’s malaise brings a more level playing field for [traditional] lenders.”

The Real Estate Capital Institute is a volunteer-based research organization tracking realty debt and equity yields. The Institute posts daily and historical benchmark rates. Call the Real Estate Capital RateLine at 7-R-E-C-A-P-I-T-A-L for hourly updates.


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