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The Real Estate Capital Scoreboard – July 2008


Chicago, Illinois, July 2, 2008 – Nearly a year ago, the capital markets imploded as Wall Street retreated on a massive scale from securitized debt investments. By this time, most lenders were very closely pricing most types of income-property deal as banks, life companies and CMBS sources crowded the markets with surplus cash. For a while mortgage spreads below 100 basis points over comparable-term treasuries were common, even for full-leverage loans.

For example in June, 2007, the rate range was extremely tight for most conventional property types. Minor pricing differentiation existed among apartments, hospitality and commercial properties, even after factoring into account primary and secondary locations. All in all, properties were financed in the 6%+ range and slightly lower for premium quality properties with conservative leverage -- in the 5.8% range.

While mortgage spreads doubled during the past year, overall “coupon” interest rates on five and ten-year maturities are relatively similar. Today, even after accounting for higher spreads of 200 basis points or more over comparable-term treasuries for permanent fixed-rate mortgages, rates start at about 6% and also may dip below this threshold level for extremely low-leverage funding situations. Mortgage spreads can be reduced by about as much as 10 to 20 basis points for low leverage multifamily deals, particularly via the agencies. And while the rate range is extremely wide, lenders will distinguish and competitively price “Core” funding opportunities in major markets much more so than a year ago. Higher-leverage, secondary market properties are priced at the high-end of the rate curve, in line with “typical” market conditions reflecting risk/reward premiums.

Permanent loan term makes a difference, depending upon the lender. Some lenders differentiate mortgage spreads between five and ten-year pricing, while others set base “floor” limits. Five year allocations are rapidly depleting as this term is popular with borrowers seeking more flexibility in anticipation of improving capital market conditions in the near term future.

As for floating rate loans, banks continue quoting over Libor and swapping-out the loans for borrower preferring fixed-rate debt. The best spreads using Libor start at about 180 bps. In a nutshell, banks are often about 25 basis points inside other funding sources for short-term funds of five years or less. For the most part, banks seldom offer 10-year fixed-rate loans.

Probably the most significant change in the marketplace relates to leverage, not rates. Today’s “full leverage” deal represents 65%, where as a year ago 75% to 80% was quite common. According to Gary Duff, advisory board member of the Real Estate Capital Institute, “All in all, rates are still very attractive by historical standards; however, more equity is required to capture financing.”


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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