The Real Estate Capital Scoreboard® – January 2008
Chicago, Illinois — January 2, 2008 — The new year triggers new hopes and fears as real estate capital markets continue readjusting from nearly a decade of uninterrupted volume and pricing momentum. While many investors fear new funding restrictions, others welcome more disciplined and “customary” underwriting practices deemed to be “normal.”
December reflected continued uncertainty with the Fed dropping rates by a quarter-point for the third consecutive time. Are more rate cuts in store for 2008? Will funds continue being more restrictive throughout the year? These and many other questions revolve around understanding markets as more clearly defined by different lender profiles. In other words, various lenders offer programs that don’t necessarily converge in pricing and underwriting as was prevalent during the first half of 2007. In summary, the following key groups of lending platforms are available today:
Banks — Banks, particularly European financial institutions, represent the most attractive floating rate pricing available. Overall spreads over LIBOR range as low as 170 basis points to over 200 basis points or more, depending upon the risk profile, leverage and property type. Banks are still relatively active for construction and acquisition loans.
Agencies — Freddie Mac, Fannie Mae and FHA/HUD are the most competitively-priced permanent lenders of any funding source in the marketplace. Overall pricing of 170 basis points or greater over comparable-term treasuries is still available. However, multifamily properties are the only beneficiaries of such attractive pricing.
Life insurance companies — Life companies have been the backbone of commercial property lending for more than 100 years. Permanent loans are priced in excess of 200 basis points over comparable-term treasuries. Funds are available, although on a more limited basis as allocation benchmarks have been rapidly depleted as some borrowers move away from securitized loans. Most life insurance companies impose restrictions of 75% leverage with minimum debt service coverage ratios of 120% for traditional income properties including multifamily, retail, industrial and office assets.
Mortgage conduits — By far, the most affected players in the marketplace during the past six to eight months. Very cautiously funding permanent debt at pricing of at least 275 basis points over comparable-term treasuries. Securitized lender’s tread capital markets with great caution as daily pricing adjustments cause havoc for lender’s trying to size deals with any certainty.
According to Gary Duff, member of the Editorial Advisory Group of the Real Estate Capital Institute, “Securitized lenders are not currently quoting deals to win.” Instead, he notes, “They will lend, but only under their terms.”