What The Fed!
While the overall capital markets and the commercial real estate market, in particular, have thus far survived the endless worries of the EU, a pending war with ISIS and now a Presidential Election that may prove historic, the recent Federal Reserve action of a small interest rate increase has resulted in a stock market “correction” along with the unexpected freefall in the 10 year US Treasury rate. During this time CMBS spreads have widened substantially due to upset in the credit and bond market.
Since the FED action in December – the 10 year U.S. Treasury rate has dropped by over 70 basis points!
Long term commercial mortgage rates remain very low, however the recent move in Treasuries have many thinking the US is headed for or in a recession. Commercial real estate (CRE) is readily available at fixed interest rates as low as 3.0% for 5 years and 3.75% for 10 years with amortization of up to 30 years. These are insurance company loans on a non-recourse basis available for acquisitions, cash-out refinance or to repay maturing or floating rate Bank debt.
Many lenders have an artificial floor rate of 4.0% that they prefer not to break. Wall Street lenders have seen spreads “gap out” dramatically such that most CMBS loans today have target +5% interest rate and are limited to lower leverage levels with LTV ratios around 65%. The overall investment market from Wall Street to Main Street continues to endure near zero returns on most investments (bonds, CD’s etc.); as mandated by a Fed policy that has run for 8 years and is projected to continue well into 2017. Fed actions in late 2015 to double the interest rate it pays banks for excess reserves to 0.50% means those banks have less incentive to make loans with this uncertain economic outlook and difficult regulatory environment.
Those excess bank reserves topped $2.3 TRILLON at year end!
CRE underwriting remains a conservative element, as Life Companies insist on underwriting at higher cap rates than actual Austin market cap rates to determine their loan amount and LTV. This results in a maximum loan to value (LTV) being in the 65-70% range and requires investors to maintain more equity (30%+) to qualify for the most attractive permanent debt. This is a position that is unlikely to soften as 2016-17 turns out to have the largest amount of maturing debt (most created at the peak in 2006) in decades and lenders will have many options to fill their pipeline.
Austin’s commercial real estate markets are viewed by lenders as robust and potentially over valued in some sectors; however the job and population growth, and rent growth continues at levels that show that market fundamentals remain strong. Most periodicals and market seers rate Austin a Top 5 U.S. market for jobs and CRE.
Please call us to discuss your financing needs on any commercial real estate project. We will be happy to size up your project or pending acquisition provide you with an array of best in class financing options.