July Financing Market Commentary
By Scott Taccati
Remember the popular 60’s song Spinning Wheels? What goes up, must come down was the lyrics I recall. Unfortunately, that has not been the case in June. After the Fed Chairman spoke in mid-June hinting about the inevitable end of QE3 beginning later this year, Treasury rates shot up and have not really subsided since. Making matters worse, spreads on all commercial real estate mortgage-backed securities also widened to levels not seen in a long time.
HUD multifamily rates started the month in the low 3% range, with spreads over the 10 Year Treasury at about 110 basis points for 35-year loans. By the end of June, spreads over the 10 Year Treasury increased by approximately 50 basis points resulting in HUD borrowing rates in the low 4% range, an increase of 100 basis points! Over the last two months the level of interest rates has increased 125 basis points. 30 Year Treasury rates bottomed at 3.17 ending near its high of 3.62. The 10-year Treasury rates were at a low of 2% to a high of 2.67% ending the month at 2.49%.
Hopefully over the next few months, spreads will constrict while overall Treasury rates level off.
Conduit, Credit Unions and Life Company financing are available in the marketplace as the commercial real estate market continues to improve. Spreads over the 10-year Treasury for higher leveraged deals are in the 200-basis point to 225 basis point range. With Treasuries up substantially in the month of June, current interest rate levels for 10 Year fixed paper is now above 4.50%. Single credit tenant deals are priced as low as 4% fixed for 25 years (co-terminus leases are required), with LTV ratios up to 95% for AAA rated credit tenants. If rates continue to increase, expect more borrowers choosing shorter terms or loans with adjustable-rate features.
One last note on property valuations, with rates increasing, cap rates will also follow the upward trend. While this typically would result in lower valuations, it is hopeful that rising rates are a result of an improved economy and improved rent levels. If this is the case, valuations will not decline as a result of higher cap rates but may actually increase.
10 Year Treasury: Low 2.00 High 2.67 Close 2.49
30 Year Treasury: Low 3.17 High 3.64 Close 3.50
HUD Multifamily Est: Low 3.10 High 4.15 Close 4.00
The table above illustrates the widening spreads that occurred for the HUD multifamily rates.
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