Market Update Q1, 2020
Now that 2019 has come to an end and we have entered the first part of 2020, Barry Slatt Mortgage would like to give our opinion on market trends for Q1, 2020:
Interest rates for long-term fixed-rate loans have decreased substantially since the end of 2018 when the 10 Year Treasury (US10Y) peaked at 3.25%. Interest rates for benchmark 10-year fixed-rate loans currently range between 3.00-4.25%.
Markets for the major loan segments (insurance company, bank, agency, CMBS, and Fund) remain very liquid:
The CMBS market was volatile in the 4th quarter of 2018 and early 2019. During the last three quarters of 2019, the CMBS market was not only stable but also had its busiest year since the 2008/2009 market crash. According to a 1/10/20 article in Commercial Mortgage Alert, “with interest rates projected to remain near rock bottom for the foreseeable future, it’s widely believed that CMBS lenders will continue to see heavy demand for debt to refinance commercial properties and fund acquisitions.”
Insurance companies are “asset allocation” lenders that compare the relative value of investing in commercial real estate loans to investing in other assets. Every insurance company has a different profile of loan type that they invest in. The commonality is that they typically hold most or all of their loans on their books as long-term investments. This can make them more cautious than other lenders such as CMBS players who make loans for the purpose of reselling rather than holding long term. Interest rates for insurance company transactions range from 3.00% for high quality low leveraged 10-year fixed-rate loans to 3.25% for smaller lower-quality loans of the same duration.
Although the bank sector has become more conservative over the past few years in the construction loan space, they are quite active in making bridge loans and short-term loans on stabilized properties. Some bankers are active in the permanent loan space with terms from 3-10-year fixed rates. There is a high level of liquidity within the bank sector.
Agency lenders had another strong year in 2019 and are looking towards a record year of volume in 2020. Many of their unique programs cannot be matched by the other lending segments. Agencies have been very aggressive on affordable housing, mobile home communities, and “green” properties that are environmentally friendly or resource-efficient. A few months ago, Fannie Mae and Freddie Mac pulled back on loan production when they met annual production goals earlier than expected. According to a 1/10/20 article in Commercial Mortgage Alert, “fears of a clamp-down on Fannie and Freddie loan purchases were set aside when the Federal Housing Finance Agency reset their caps October 1 in a way that allows them to increase their overall volume while putting more emphasis on affordable housing mortgages.”
- Most major MSAs throughout the United States remain attractive origination grounds for lenders. Multi-family, industrial, office, and retail properties appear to be the focus for most lenders. Storage and hospitality also continue to be favorable asset classes with a large supporting lender cast.
- High liquidity in the market has continued to foster competition among lenders and creates flexible terms for borrowers. Loans are currently available with features such as flexible prepayment penalties, interest-only (when leverage permits), and high leverage. We expect this to continue as lenders’ demand for the yield continues to be satisfied through the placement of mortgages secured by commercial and multi-family real estate assets.