I hate to say it, but it appears the low-rate party is over for the time being. To all who successfully placed long term debt in 2016 prior to the election, CONGRATULATIONS. Now it is time to meander through various considerations for 2017. The chart above represents the 10-year treasury yield.
The FHA spreads have remained very tight, but rates have increased from 2.85% to 3.45% in just a short period of 45 days. OUCH! Adding MIP to the equation for FHA brings the long-term all-in rate now above 4%. Not bad at all historically. However, all other sectors have seen margins stop constricting. The CMBS arena has widened due to higher returns required on the rating component of a pool below AAA. The overall CMBS spreads have widened to a level that the best pricing is 5% for the best product, for 10 years. FNMA fully leverage deals are in the upper 4% range or multifamily product.
Everybody and their brother, sister too for that matter, knows the FED is increasing the short-term rates next year, after increasing yesterday by a .25%. There is always a chance at a flattening yield curve so long-term rates do not follow suit. Who knows? Oil prices, inflation, international logistics will play a big part on where these rates will be. Real estate investments worked so nicely in the mid 4% and below. Getting up over 5% for long term money will pose some challenges for some deals. The anticipated results are as follows:
1. LTV ratio restrictions will become irrelevant in most cases as DSC ratio restrictions will limit loan amounts at interest rates above 5%.
2. Cap rates, particularly for loan underwriters are going only in one direction…UP. The market will definitely begin to require higher returns as well as lender underwriting cap rates. Equity requirements may be higher due to lower loan amounts that are cut as a result of DSC coverage requirements.
3. There are a few billion dollars of maturing loans coming to the market over the next two year. Many of these loans will not size up at rate levels above 5% and will possibly not have adequate sponsorship behind them. Perhaps troubled asset opportunities lie ahead, which hasn’t been the case in about 5 to 6 years.
4. Debt yields will begin rising due to loan amounts being cut not necessarily due to LTV ratio requirements, but DSC ratio requirements at higher rates.
In summary, prepare for higher rates and hope for the best. We have been expecting this for years, so let’s take action accordingly.
HAPPY HOLIDAYS TO ALL! MERRY CHRISTMAS AND HAPPY NEW YEAR!!!!!