The Real Estate Capital Scoreboard® – November 2009
Chicago, Illinois, November 2, 2009 – The recovering stock market is gradually translating to more favorable conditions in the realty capital markets. While the capital markets are relatively dormant as lenders seek to shore up the balance sheets, select life companies, banks and private funding sources continue conservatively funding transactions.
Furthermore, Mortgage REITs have reentered the market, seeking higher leverage loans, but at larger rate premiums. Greater competition from this sector will continue pressuring other lenders to offer better pricing.
Regardless of pricing, project quality and sponsorship remain tantamount as lenders stay defensive. As such, current pricing trends include the following:
- During the past month, benchmark treasury yields moved nearly a quarter percent higher, yet rates remained steady as many lenders continue using rate floors for permanent loans.
- Floating rate debt remained unchanged as prime bank customers pay floating-rate pricing starting at about 4.5%.
- While new transactions are still rare, refinancings and restructuring of loans remains in the forefront of real estate capital markets. Appraisers and investors are using band-of-investment calculations for sizing values and loans absent of any relevant market comparable data. Given current debt pricing, capitalization rates under such models typical start at 7% for multifamily properties and 8.5% for commercial assets. Multifamily agency pricing favors securitized loans vs. balance sheet debt as the agencies CMBS markets slowly recover.
- Opportunity investors armed with significant equity capital aggressively hunt for bargain price distressed assets with pricing of 20% or more on an overall return basis using five-years or less time horizon.
- Commercial and industrial tenants with specialized space needs and multifamily projects using FHA funds, such as 221(d)(4), are the only sources of new construction demand. Return-on-cost yields start at 8% for “definable” credit-worthy tenants, otherwise double-digit figures are more representative of current development risk pricing.
Aaron Gruen, an Advisory Board Member of the Real Estate Capital Institute notes, “The Great Recession has permanently altered consumer, investment, and governmental behavior.Both public and private sector interests which influence land use and economic development need to reset their models and practices to work out projects and plans affected by the Great Recession and to respond to the opportunities the economic recovery will present.”