The Real Estate Capital Scoreboard® – October 2008
Chicago, Illinois, October 1, 2008 – It’s a good news/bad news real estate capital marketplace. Mortgage markets are plagued by Wall Street market malaise and swooning prices, yet as far as commercial real estate debt is concerned, overall default rates and profit performance remain at historically favorable levels Funding sources and borrowers alike are very selectively funding and acquiring projects as re-pricing opportunities emerge in the wake of one of the nation’s worst financial crisis.
Dramatic market volatility created by major financial institutions failing along with selective governmental bailouts, wrecks havoc with real estate capital markets with some key trends developing, including:
- Skyrocketing Libor pricing (with rate premiums) now closely reflects domestic Bank Prime rates.
- Funding availability is the primary factor within the lending sector, surpassing pricing and leverage as key variables.
- Numerous balance-sheet lenders are temporarily suspending quoting on new transactions as market re-pricing continues (e.g. “catching a falling knife” syndrome)
- More funding sources are returning to pricing loans based on absolute net yields vs. spreads.
- New construction commercial-property financing is nearly at a halt, unless a substantial preleasing is available to credit tenants with preleasing required positive debt service coverage.
- Lending remains extremely restrictive, particularly for non-conventional property types such as lodging. Special-purpose and recreational properties.
- Commercial properties (retail, office and industrial) conservatively financed with maximum leverage of 65% based on capitalization rates in the higher single-digit range.
- Multifamily properties remain the most desirable and attractively priced funding opportunities in the capital markets as leverage levels remain close to historical norms and pricing spreads are in the mid-200 basis point range over comparable-term Treasuries. Government bodies including Freddie Mac, Fannie Mae and FHA/HUD continue providing competitively-priced mortgages for this sector.
- Borrowers are bridging equity gap by providing personal guarantees an additional collateral, perfectly with commercial banks
- Buyers and borrowers who are active in closing deals are rich with liquidity. Many use recourse and additional collateral to successfully finance projects.
According to Jeff Davis, advisory board member of the Real Estate Capital Institute, “Except for select Agency programs such as FHA/HUD, most funding sources are waiting for more clear market signals for the remainder of the year.” He adds, “Active lenders seem to have met their allocation goals as funds continue drying up within the securitized lending sector.”