As the summer comes to a close and the recent stock market rally subsides, borrowers are left wondering what the future will bring for commercial real estate loans. At the end of August there were several treasury issuances that were well received by the market as more than $16 billion of new notes issued were digested easily. In late August, Fed Chairman Ben Bernanke said that “prospects for a return to economic growth in the near term appear good."
The end of summer brought a jump in existing home sales, improvement in consumer sentiment, and increased consumer spending, in part due to the successful cash for clunkers program. Even with the issuance of new treasuries, the 10-year treasury rate fell for the month of August with help from the positive economic news. The 10-year treasury was down almost 50 basis points for the month. A combination of lower treasury rates and contracting lender spreads means attractive interest rates on quality, performing commercial real estate debt.
As the economic news improves, we are seeing lenders becoming more active in the commercial real estate lending market. A few months ago, it seemed that there were very few players in the market, mainly life insurance companies with very conservative loans or banks lending to repeat borrowers in an effort to control deposits. Several life insurance companies and banks that have been inactive over the past year are beginning to come back into the market.
While still underwriting conservative cap rates and trending performance, lenders are becoming more competitive to win quality deals. A typical commercial real estate loan in today’s market is less than a 70% loan to value, greater than a 1.25x debt service coverage ratio and has an interest rate from 6.0% to 7.50% based on term, loan to value, asset type, and location.
August 2009 Treasury Highlights:
August 10-year treasury high: 3.85% on August 9
August 10-year treasury low: 3.39% on August 31
Issues Affecting Commercial Mortgage Rates:
· 10-year treasury declined almost 40 basis points during the month
· $16 billion of new treasury supply released in the last two weeks of August was well received by the market and treasury rates actually moved lower
· Federal Reserve continuing Treasury repurchase program to help stabilize the price as the new issuances continue
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