Market Watch: April 2009

During late March, the supply of US Treasuries dramatically increased as $98 billion in five and seven year term notes were issued.

Shortly after the supply increase, the Fed began buying up treasuries in an attempt to control interest rates from skyrocketing. In recent days, approximately $15 billion has already been spent at treasury auctions for 3, 7, and 10 year notes. Showing some positive feedback, treasury rates trended downward toward the end of the month. In this historic low-rate environment, the Fed’s purchase of treasury notes is a key component to keeping inflation under control.

A toxic asset purchase plan was introduced in March to aid financial institutions with getting non-performing assets off their books to stave off future "mark to market" write-downs. According to the plan, the Treasury could spend up to $1 trillion removing these "toxic assets" from the company’s balance sheet. Government money would be coupled with private investment, sharing in the risk/reward as these loans mature. The market found comfort in the Fed’s plan as the Dow finished the month up almost 20% from recent lows.

In addition, there have been conversations regarding the modification of "mark to market" accounting rules. This could counteract the Fed’s asset purchase plan by making it more attractive for bankers to hold onto non-performing loans, however, it may also relieve financial institutions from taking future write-downs on their already heavily discounted portfolios.

Commercial mortgage rates have come in slightly for the month, thanks to sharp treasury declines, as US treasuries are used as a ‘benchmark’ for commercial mortgage pricing. Lenders continue to be conservative but are active in today’s market. We are currently closing 5, 7, & 10-year fixed-rate loans with correspondent life insurance company lenders as well as other sources including Fannie Mae & Freddie Mac.

March 2009 Treasury Highlights:
• March 10 Year Treasury High: 3.02% on March 1st
• March 10 Year Treasury Low: 2.54% on March 18th
• March 10 Year Treasury Month-End: 2.66%

Issues Affecting Commercial Mortgage Rates:
• Steep declines in US Treasury Rates even as Government increases supply
• Swap spreads holding steady after Treasury decline, keeping Interest Rates near all time lows
• Fannie Mae & Freddie Mac extremely competitive on Multi-Family financing with Rates for a 10 Year Fixed Rate Loan well under 6%
• Local banks feeling pressure as Fed’s issue "stress tests" on their real estate portfolios
• Stringent underwriting has Lenders trending rent and expense projections based on the economic outlook insuring against future portfolio defaults

NBS Releases First Quarter Reports for Portland Metropolitan Area

NBS has released First Quarter 2009 market reports. These reports cover the office, industrial, retail and multifamily product types, as well as a general overview of the economy. They can be found on our Web site here.

NBS Financial Secures $3.7M for Edmonds Apartments

Fairway Apartments - Edmonds, Washington

• $3,700,000 loan
• 38-unit apartment community
• Unique loan feature: No prepayment penalty
• 70% loan-to-value - 1.20 debt service coverage ratio
• Financed by Erich Guenther of NBS Financial's Seattle office

February News Recap

Andrew Patterson - Associate Finance Officer, Seattle

Economic News Recap:

After 3.6 million jobs lost since December 2007, Bloomberg reports that unemployment will likely increase to almost 8.5% in 2009, contracting to 7.9% in 2010 as the economy begins to rebound. Orders for durable goods also fell 5.2% in January as sales of new homes reached record lows. As the economic news is grim, there was an issuance of agency CMBS in the last few days of February. This issuance, one of few in recent months, signals government agencies trying to revive the CMBS market which could free up lending capacity for banks as unsold CMBS paper sits on their books. Although it’s only a start, the ability to sell CMBS paper will result in increased liquidity for lenders.

Obama Administration’s Budget Released:

The budget President Obama released in the last few days of February discusses details of the economic policy that is being proposed to congress. The budget outlines plans for $750 billion in additional aid for the financial industry and an overhaul of the health-care system, tax policy and defense spending. With a government spending increase of 32% compared to the 2008 budget, Obama says, “While we must add to our deficits in the short term to provide immediate relief to families and get our economy moving, it is only by restoring fiscal discipline over the long run that we can produce sustained growth and shared prosperity.”

Interest Rate Outlook:

Long term rates are steadily increasing as the volatility in the market continues. Ten year US Treasury rates are up almost 25 basis points in the past two weeks as the government has increased the supply of Treasuries to the market. As the Obama administration releases its budget, a substantially expanding national deficit will inevitably raise long term interest rates. Now is the time to review financing options on your commercial real estate property to position it properly in this challenging economy.

February 2009 Treasury Highlights:
• February 10 Year Treasury High: 3.02% on 2-28-2009
• February 10 Year Treasury Low: 2.65% on 2-17-2009

Issues Affecting Commercial Mortgage Rates:
• 10-Year Treasury increase of 35 basis points in February 2009
• Market turmoil prolongs lender’s hesitation to lend on commercial real estate
• Amid a credit crunch and a slowing economy, interest rates remain at near historic lows
• Life Insurance lenders have money to lend and are active in the market

Rates Still Low and Seattle a Bright Spot for Commercial RE Lending

Andrew Patterson - Associate Finance Officer, Seattle

The 10 Year US Treasury, a benchmark for commercial lending rates, is still at historically low rates even after a 50 basis point increase since late December. During a recent Federal Open Market Committee meeting, leaders voted to keep the federal funds target at "exceptionally low levels for some time," though many analysts fear inflationary pressure will result in long term rates trending up in 2009 and 2010. The expectation of an ever-expanding Treasury supply is also putting upward pressure on long term rates, despite the Fed’s best intentions. If you have a loan coming due in the next 18 months, it might be prudent to look at refinancing early.

According to a recent Marcus & Millichap report, Seattle is the #5 apartment investment market in the country. Despite the local housing market slowing and several major local companies announcing layoffs, the "Seattle apartment market will continue to attract investors." The report also predicted an "above-average rent growth forecast" of 2.7%. Renter demand is expected to increase due in part to multi-million square foot office leasing commitments in the Bellevue and South Lake Union submarkets from technology companies like Amazon and Microsoft.

Our Life Companies are actively quoting and closing commercial real estate loans in the Seattle area. Many of these lenders are focused on making loans in the first half of 2009 because of growing concern in the credit markets and the overall economy. At NBS Financial Services, we are continuing to close commercial real estate loans all over the greater Puget Sound area.

January 2009 Treasury Highlights:
• 10 Year Treasury 45 Day Low: 2.05% on 12-30-2008
• January 10 Year Treasury High: 2.85% on 1-31-2008
• January 10 Year Treasury Low: 2.20% on 1-14-2008

Issues Affecting Commercial Mortgage Rates:
• Life Companies have money and are active in the market
• Market flooded with US Treasuries causing benchmark rate to increase
• Cap Rates trending upward, in the Seattle area by 50 to 100 basis points
• Fannie Mae & Freddie Mac tightening underwriting criteria, raising rates on short term lending
• Future Treasury volatility predicted as we move through the financial crisis

Looking Ahead to 2009 . . .

Andrew Patterson - Associate Finance Officer, Seattle

2008 was a challenging year for the commercial real estate market, but NBS Financial Services overcame market conditions to secure more than $300 million in commercial real estate loans. NBS originated 75% of its loans with life insurance companies, with the remaining 25% coming from other sources.

Life companies still have money to lend and will be the dominant lenders in 2009. Commercial real estate is a solid investment for these companies that need to match debt with insurance policies, and each year they have new allocations for CRE investments. After years of doing business and developing relationships with so many of these companies, NBS Financial has access to billions of dollars of capital in 2009.

Some economic factors bode well for commercial lending in 2009. Treasury rates, a benchmark for commercial real estate loan pricing, are at historic lows, making the first and second quarters of 2009 attractive for commercial real estate financing. For qualified properties, 10-year fixed rate loans are currently about 6.0%, the lowest these rates have been in years.

2008 Treasury Highlights:
• 10 Year Treasury High (year): 4.27% on 6.16.2008
• 10 Year Treasury Low (year): 2.06% on 12.30.2008

Issues Affecting Commercial Mortgage Rates:
• 10 Year Treasury at historic lows
• Life Companies still have money and are active in the market
• Lenders trending towards lower loan to value and higher debt service coverage ratios as they under-write more conseratively
• Cap Rates trending upward
• Life Companies will be the dominant lending source for commercial real estate in 2009