The Real Estate Capital Scoreboard® – December 2008
Chicago, Illinois, December 1, 2008 – The Fed’s aggressive action of pumping more liquidity into financial markets is starting to reinvigorate real estate lending. Helped by TARP funds, select financial institutions are offering competitive short-term loans. Furthermore the Treasury yield curve moved downward by about a half percent during the past month, easing overall pricing.
Current income-property mortgage pricing and underwriting trends are outlined as follows:
- While liquidity remains a key concern, overall interest rates are moving downward.
- Despite wild fluctuations in key indices (e.g., LIBOR), keeping track of pricing is becoming less challenging as numerous funding sources impose rate floors.
- Floating rate debt starting at 5% is among the most competitive pricing options available, while most types of longer-term financings start at 6%.
- Subsidized by agency funds, multifamily properties attract the lowest price debt, while office, industrial and retail properties capture pricing that is at least 25 to 75 basis points higher.
- Debt service coverage restrictions start at 120% for acquisitions and 125% or more for refinancings. And while debt service coverages remain somewhat constant, shorter amortization schedules of 25 years or less are used as additional underwriting safety measures along with overall lower-leverage underwriting of 65% of value (apartments are still funded in excess of 70%).
The chart below summarizes overall debt rate ranges for various properties:
The Real Estate Capital Institute’s advisory board member, John Oharenko, comments “Pricing discussions are returning to absolute rates, rather than quoting spreads.” He argues that the limited universe of active lenders fully dictate terms, including establishing minimum pricing thresholds which are not necessarily linked to specific indices such as Treasurys or LIBOR. Oharenko adds, “Expect to see lower mortgage rates for 2009 as the Fed continues a monetary blitz of helping banks and other financial institutions return to the market to recreate more competition and liquidity.”