Fixed Rate Financing Amidst Market Swings

August 20, 2014

Investors are taking advantage of fixed rate financing during recent market swings. Although a different animal altogether than the market swings prior to the downturn, the recent volatility in the CMBS market brings back uncomfortable memories for a few investors.

Spreads have widened anywhere from 15 to 25 basis points from floor levels established in mid-July. As a result many borrowers in process with CMBS lenders experienced changes in the pricing of their loans, illustrating there are still some unavoidable risks associated with a CMBS platform.

Despite the known risks, CMBS lenders provide balance in the marketplace. Investors should recognize that the CMBS platform was born out of necessity. In the early 90’s these lenders saw an opportunity to capitalize on providing investors longer term fixed rate financing at higher leverage with longer amortization than life insurance companies and most banks were willing to stretch on. There are very few lenders able to truly provide this combination of terms and conditions. The CMBS market is on pace to exceed $100B in commercial property financing this year. Without it, the strain of handling the maturing debt coming in 2015 and 2016 on banks and life companies would be tremendous.

The recent CMBS volatility has many investors exploring other lending options—truth is there simply aren’t that many. It’s imperative to understand that life insurance lenders play an equally important role in the commercial loan market. Though most life companies will not typically compete with the leverage and amortization that CMBS lender provide, they do excel by offering very competitive long term fixed rates. With the Treasury yield dipping to levels rarely seen in past years, many investors are taking advantage of life insurance financing that provides fixed rate financing ranging from 3 to 25 years. Another data point to keep in mind is that life companies can provide interest rate protection during the application process. The ability to provide a true interest rate lock from application through closing takes particular risks off the table that most CMBS lenders are unwilling provide.

We can agree that both CMBS and life company lenders each play vital roles in the commercial financing landscape. There are lenders that push leverage and provide interest only loans, and there are some that allow for a 90-120 day rate locks with up to 25-years fixed rate. When all is said and done, it comes down to individual investor needs. No one knows where interest may be heading, but there are few historical examples of opportunities to secure rates at current levels with such long terms.

by Michael Kaplan, COO