The Real Estate Capital Scoreboard® – May 2009
Chicago, Illinois, May 1, 2009 – Within the past month, rates have continually climbed for longer-term treasuries, nudging upward by more than a quarter point. In the meantime, the most active lenders in the marketplace — the Agencies (Freddie Mac, Fannie Mae and FHA/HUD) — correspondingly dropped mortgage spreads.
As a result, overall interest rates remain relatively competitive for multifamily properties, starting in the mid-five-percent range for ten-year debt. Leverage levels of 75% of value are still available for this asset class.
In contrast, other income properties, including office, retail and industrial assets are underwritten to extremely stingy standards. Few lenders are actively seeking new origination funding opportunities as workouts and corporate viability issues overshadow mortgage lending goals. Commercial loans are generally funded at levels of 65% or less with overall interest rates starting in the higher-6% range and climbing into the mid-8% range.
Full leverage funding opportunities still exist for credit-anchored projects in all income-property categories, as long as BBB or better rated credit ratings are available with reasonable remaining lease terms.
Bright spots in the capital funding marketplace are also beginning to appear. More life companies, banks, pension funds and other sources not plagued with legacy deals are reemerging. Initially, the pricing requirements are steep and leverage remains conservative, but some loosening is expected as these players start competing for transactions.
As far as specific benchmarks for any funding opportunities within today’s market, the following items are nearly universal minimum requirements:
- Lower Values: Property values continued declining as more investors realize operating losses and lenders foreclose on distressed assets.
- Limited Growth: Few, if any, markets are underwritten with any type of income growth. On the contrary, most lenders are forecasting flat, or declining income conditions with expenses rising.
- Higher coverage: 125% debt service coverage ratio for nearly all properties is a minimum threshold.
- Greater Equity: For refinancings, borrowers must show at least 20% or more of “real” equity as cashouts are frowned upon.
- More Reserves: Effective property age concerns are forcing borrowers to set up larger reserves for maintaining and retaining competitiveness.
Barry Moss, a Real Estate Capital Institute Advisory Board member, notes “Lenders, borrowers, investors, tenants, developers and nearly everyone in the real estate industry is in a defensive mode.” He suggests, “As TARP/TALP funds trickle into the financial system and lenders mark down legacy assets to current metrics and sell those assets, more badly-needed liquidity will return to the industry and transaction activity will increase.”