Market Update Q2, 2019
June 20, 2019

The following are 2nd quarter 2019 market trends that have been identified by Barry Slatt Mortgage:

  1. Interest rates for long-term fixed-rate loans have decreased substantially since the end of 2018. While adjustable rate loans based on U.S. Prime and LIBOR are still high due to the Fed’s increases on short-term rates, interest rates for benchmark 10-year fixed-rate loans currently range between 3.30-4.50%. Many prognosticators believe that the Fed will be lowering short term rates in the coming months.
  2. Markets for the major loan segments (life company, bank, agency, CMBS, and Fund) remain liquid:­­
    The CMBS market was volatile in the 4th quarter of 2018 and early 2019. The market has stabilized this year and prognosticators have seen pricing tighten and lenders become aggressive again as we hit the end of the 2nd quarter. Most loans contain partial or full loan term interest only components. We have seen interest rates in the CMBS space range from the high 3% to mid 4% range.  For lower leverage transaction, CMBS is able to price compete with the low rate providers in the market.

    Life Insurance Company
    Life insurance companies are “asset allocation” lenders that compare the relative value of investing in commercial real estate loans to investing in other assets. Every life 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. Most life insurance companies have set their allocation goals for 2019 and most have moderately increased. It appears that the life company industry will have plenty of money to lend in the 2nd half of 2019.

    Loans from life insurance company lenders are pricing from mid 120 spreads on high-quality low-leverage assets to 200 over the corresponding treasury for higher-leverage general real estate assets.  There is a vast range of life insurance company lenders active in the market. Each life insurance company lender has their own set of criteria for investments in commercial real estate loans.

    Although the bank sector has become more conservative over the past few years in the construction loan business, 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. Expect to see the focus shift to shorter-term loans versus long term as the yield curve inverts and risk for the banks increases with providing and holding long term debt.

    Agency lenders expect another strong year in 2019. Many of their unique programs cannot be matched by the other lending segments. Agencies are being very aggressive on affordable housing, mobile home communities, and properties that can become greener.

    Interest rates in the agency space are down over 50 basis points from 60-days ago which has driven a large uptick in multi-family transaction volume as many sponsors are looking secure long-term debt in this favorable rate environment.

    Additionally, agencies have continued to compete in secondary and some tertiary markets where other lenders have stayed away. Both Fannie Mae and Freddie Mac have small loan programs that tend to target such smaller markets and provide 75% LTV loans as low as $1,000,000.

  3. Most major MSA’s 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.
  4. 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.