The following are 3rd quarter market trends that have been identified by Barry Slatt Mortgage.
- Interest rates for long-term fixed-rate loans continue to remain low. While adjustable rate loans based on U.S. Prime and LIBOR continue to adjust upward as the Fed is pushing short-term rates up, interest rates for benchmark 10-year fixed-rate loans currently range between 3.90-5.00% (unchanged for most of 2018).
- Markets for the major loan segments remain liquid:
After a stable 2017, the CMBS market remained strong in Q1 and Q2 of 2018. Issuance in 2017 reached approximately $95B compared to approximately $75B in 2016. CMBS lenders are continuing to be aggressive in the third quarter of 2018. Most loans contain at least partial interest-only terms and most 10-year term loans are being placed with 4.50-5.25% coupons. For lower leverage (sub 50% LTV) requests, CMBS lenders have shown that they will compete with the lowest rate players 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. Current yields on most commercial real estate loans are higher than what life insurance companies can obtain by investing in high-quality bonds. Every life insurance company has a different profile of loan types that they invest in. The commonality is that they typically hold most or all of the loan on their books as a long-term investment. This can make them more cautious than other lenders such as CMBS players who make loans for reselling rather than holding long term. Most insurance companies have plenty of money left to invest in commercial real estate loans for the second half of 2018.
Loans from life insurance company lenders are pricing from low 100 spreads on high-quality low-leverage assets and 165-200 over the corresponding treasury for higher-leverage general real estate assets. There are 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. As some banks continue to offer 10-year fixed rate terms with competitive rates, we expect to see their focus continue to shift to the origination of 5 and 7-year term product as we move further into the cycle. According to a 7/27/18 article in Commercial Mortgage Alert, in 2018 “Banks originated 48% of non-agency loans, up from 18% a year earlier…”.
Agency lenders are forecasting another strong year for 2018. 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. Additionally, agencies have continued to compete in secondary and some tertiary markets where other lenders have stayed away. According to a 7/27/18 article in Commercial Mortgage Alert “The two agencies’ purchases moved in different directions in the first half. Freddie’s volume climbed by 8% year-over-year, to $28.9 billion from $26.8 billion. Meanwhile, Fannie’s activity fell by 13%, to $25.8 billion from $29.7 billion.”
- 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.
- 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 lender’s demand for the yield continues to be satisfied through the placement of mortgages secured by commercial and multi-family real estate assets.