The Real Estate Capital Scoreboard® – May 2007
Chicago, Illinois, May 1, 2007 – During the past month treasuries bounced about an eight of a percent, but closing at nearly identical levels to March. And while rates remained unchanged, the subprime mortgage market and other technical factors forced mortgage spreads to increase by about 15 basis points. As a result, B-piece debt buyers are now demanding greater risk premiums.
In general, realty debt markets maintain strong fundamentals, but remain oversupplied. Therefore, lenders demonstrate tremendous flexibility to attract more opportunities. Many are not competing on typical terms and conditions such as coupon rates, leverage limits, debt service coverage and prepayment provisions – nearly all these variable are stretched to their limits. Instead, lenders are pursuing more atypical property types. Marinas, restaurants, golf courses, unflagged hotels and service stations are some of the “new” funding opportunities being entertained. In other words, anything with a reasonable cash-flow stream is game in today’s market.
Key discussion topics include:
- Today’s market conditions dictate that yield maintenance and defeasance provisions are virtually priced the same, since overall rates are seen as declining by the bond markets.
- Low, stable rates support continued low capitalization rates – values are at peak levels
- Despite subprime market concerns, commercial property fundamentals are solid
- High construction costs and more restrictive land use policies keep new supply in check
OBSERVATIONS:
The Real Estate Capital Institute’s Advisory Board Member, John Oharenko, notes, “Realty capital markets are fraught with cash. Virtually any project backed by qualified sponsorship and sound economics is financeable.”