Lenders' Insatiable Appetite for Commercial Real Estate
DEBT YIELDS AND FINANCING CAP RATES SHOW SIGNS OF LEVELING OFF
» RATES LITTLE-CHANGED, BUT SPREADS NARROW ON HIGHER TREASURY YIELDS
» RISK-TAKING ON LOANS FOR LARGE OFFICE BUILDINGS AND RETAIL PROPERTIES
» A FINE LINE BETWEEN EASING STANDARDS AND WEAKER UNDERWRITING
Debt yields and cap rates on new commercial real estate lending declined at a slower pace in Q1 2013. Industrial property debt yields and cap rates were practically unchanged across mortgages made by banks, life companies, and CMBS conduit originators in support of both acquisitions and refinancing. Debt yields and cap rates declined only slightly for office and retail lending, but spreads narrowed observably as Treasury yields inched up. Although national retail debt yields were lower than office in the first quarter, the ranks were reversed when comparing just urban properties in top-tier metros. For long-term fixed-rate loans, the average interest rate on new originations was 40 to 50 basis points higher than for apartment debt.
Aggressive financing valuations on large office buildings reflect the impact of low risk-free rates, competition amongst institutional investors to acquire liquid assets, and amongst lenders to finance transactions with strong sponsors. Pricing and leverage on the most actively contested office properties easily matched the top end of the apartment market during the first quarter. Underwriting to in-place cash flow remains the norm. However, favorable assumptions about cash flow growth in the context of rising interest rates and the increasing prevalence of interest-only and partial interest-only loans indicate greater scrutiny of evolving balance sheet and CMBS conduit standards.
About the Reports Chandan Economics' quarterly lending trends reports leverage data on mortgages originated across capital sources — by banks, life companies, agency lenders, and conduit lenders. The national report is generally published four weeks following the end of the calendar quarter. Metro-level reports are published the following week. Visit « Debt & Credit Analytics » / « Debt Trends » on the Chandan Economics client site, or contact us for information about subscribing to Chandan's research services.
May 2013 Debt Markets Briefing
Quarterly Lending Trends and Credit Risk Outlook • May 21 2013 • Registration Now Open