Mortgage Interest Rates – Heading Up!

Capital markets and the commercial real estate market face rising interest rates and what bond king Bill Gross is calling “a bear market in bonds”; all this while the Dow continues to set records above 25,000. Recent tax reform and Federal Reserve promises of up to 4 additional rate increases in 2018 will weigh on mortgage interest rates.

The 10 Year US treasury bond breached 2.58% on January 10th revealing a rate increase of 60 basis points since September. The last time the 10 year UST broke 2.60% was October 2016 prior to the US Presidential election and has not exceeded the 3.0% threshold since the Fall of ‘14.

Commercial mortgage rates today remain attractive near 4.0% for 10 years with amortization of up to 30 years.  These non-recourse, permanent loans are readily available for acquisitions, cash-out or to finally refinance floating rate Bank debt that will see rising rates for all of 2018 and beyond.

Underwriting remains the key element, as lenders remain conservative on loan proceeds with 65-70% LTV targets. Bank lending has become more conservative as well with loan to cost now more commonly below 70%. Permanent lenders underwrite using higher cap rates of 6.5-7.0% to size a loan vs. the historically lower Austin market cap rates. As a result, investors will be required to invest more equity in deals in the range of 30-35%.

The Austin/Central Texas market remains very much in favor by lenders as one of the Top 3 markets in the U.S. however there is clearly stress on affordability in rents, housing prices and the cost to develop commercial space. The U.S. Federal income tax reform just enacted should benefit lower tax states like Texas over coastal markets in California, New York/New Jersey; although the new deduction limitations will have an impact on all real estate owners.

 

Call us 512-450-6800 to discuss your financing needs on any commercial real estate project.

We will be happy to size up your project or pending acquisition and provide you with an array of best in class financing options.