September Financing Market & Trading Desk Commentary

By Scott Taccati

Overall Treasuries seem to have finally stopped its ascent to Lord knows where during the last month. As of this writing, 10 Year Treasury rates are now at 2.75%. Recently quoted HUD multifamily rates are now in the 4.375% range. While Treasuries have seemed to bounce off resistance points in the 2.90% range, investors for GNMA securities are continuing to demand higher returns, thus spreads have not yet tightened, but have actually continued to moderately widen. August is historically a bad month for GNMA securities transactions due to less buyers in the marketplace. We anticipate the market to improve in the coming months relative to spreads, however, how much is certainly an unknown. Last April, demand for multifamily securities displayed similar dynamics as today when compared to the single-family MBS markets…i.e., yield demands were higher for multifamily securities when compared to single family securities. In May of this year those dynamics changed as spreads improved dramatically for multifamily securities. We expect the demand for multifamily securities to increase over the coming months, thus improving spreads. August GNMA security activity is down significantly from prior months when compared to recent history. This is directly attributable to the spike in interest rates and spreads.

Overall commercial real estate financing from all lender’s perspectives are continuing to improve due to the liquidity in the marketplace and overall stability that has taken place in the commercial real estate market. Portfolio lenders (life companies, banks and credit unions) spreads may actually decline for quality deals due to the competitive pressures that exist in the marketplace. Conduit market or CMBS activity will continue to improve, however overall borrowing costs are anticipated to range from 5% to 6% on stabilized properties, depending on the LTV ratio and class of property. Debt yield (NOI/Loan Amount) for traditional property types are in the 10% range and 11% for non-traditional properties such as hotels. This implies a cap rate in the 7.5% range generally. Note we have financed several multifamily properties that exhibited cap rates in the low 6% range. Additionally, look for DSC ratio restrictions to become a factor in loan amount as well at present rate levels.

Construction and development loans will continue to be an easier achievement for borrowers on multifamily projects as well as pre-leased properties. Residential acquisition and development loans are still very difficult to obtain from lenders, though hard money lenders are out there at net borrowing costs that require an effective rate of return of 12%+.

10 Year Treasury:
Low 2.61 High 2.92
Close 2.75

30 Year Treasury:
Low 3.64 High 3.94
Close 3.68

HUD Multifamily Est:
Low 4.00 High 4.50
Close 4.375

Monthly Highlight

TCR is pleased to announce the successful financing of two apartment complexes totaling over $16 million at 3.05% fixed for 35 years. Note this was locked in May prior to rate spike.