Market Update Q4 2019

November 7, 2019

As we head into the final 7 weeks of 2019, Barry Slatt Mortgage would like to talk about 4th quarter market trends we have identified:

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%. The Fed has lowered the federal funds rate by a quarter-point three times this year and has recently announced that they are taking a “wait and see” approach.

Markets for the major loan segments (insurance 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 4th quarter. Most loans contain partial or full loan term interest-only components. We have seen interest rates in the CMBS space range from 3.25%-4.00%. For lower leverage transactions, CMBS is able to price compete with low rate providers from other segments in the market. According to many CMBS leaders, this year’s CMBS origination volume will outperform 2018.

Insurance Company
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 have had another strong year in 2019. 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 9/6 article in Commercial Mortgage Alert, “After acquiring multi-family loans at a record-breaking pace over the first seven months of the year, Fannie Mae and Freddie Mac have sharply pulled back in recent weeks, opening up opportunities for private sector shops.” However, Agency lenders have since commenced lending and are looking towards a strong 2020 production year.

  1. 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.
  2. 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.