Q4 Capital Markets Update
published Oct. 16, 2024
Lender Spread Volatility Continues
With rate uncertainty persisting, particularly around the labor market as it relates to the Feds next move, both lenders and equity capital have remained patient and selective. With inflation seeming to be under control (for the moment), the strong jobs report caused a considerable uptick in long-term treasury rates this October. But can we expect a downward revision to the jobs report? The biggest gains came from food and beverage service jobs, of which the jobs report does not account for workers having two or more jobs at the same time. My bet is we will see a revision in the jobs report such that the Fed will still make two more cuts this year. The market has a 97% probability of a 25 basis point rate cut at the next meeting November 7th.
The forward curve graph below gives a picture of the market's projection on short term rates (Term SOFR) and the 5 and 10-year treasuries, which are largely expected to remain around 4% (+/- 25 basis points) for the next few years. If this is the case, pressure will remain on finding creative ways and lenders who will push loan proceeds to alleviate cash-in refinances.
Of our recent permanent loan placements, we've seen most of the banks set floor rates around 6%, while the credit unions have competed much more aggressively by quoting spreads over the treasuries and making underwriting exceptions to win loans. They continue to provide the significant advantage with no or stepdown prepays, while the Life Companies and Agencies are generally Yield Maintenance or Defeasance. See below for recent rate-locks.
Rate-Locked Loans in October
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5.50% 5-year Fixed, 65% LTV - Industrial Refinance (Cash-out)
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5.51% 3-year Fixed, 65% LTV - Retail Refinance (construction take-out)
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5.64% 5-year Fixed, 65% LTV - Multifamily Refinance (construction take-out)
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5.80% 5-year Fixed, 70% LTV - Multifamily Acquisition
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6.45% 5-year Fixed, 65% LTV - Hotel Refinance (Cash-out)
Rate and Economic Indicators
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10 Year Treasury drops to 4.0%: The forward curve is pinning the 10-year in the low 4%'s for the next several years.
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Term SOFR down to 4.78% from 5.33% last quarter: Expected to fall to the low-3%'s in late 2025.
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Unemployment Rate remains at 4.1%: comparable to last quarter.
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Core CPI: Up to 3.3% from 3.0% last quarter.
Hot Money
1.30%-1.45% Spreads - Lower Leverage Perm Loans
Loan Size: $3 - $75 Million
Geography: All states from Texas west
Property-Type: Stabilized Industrial, Multifamily, Retail, Medical Office, & Hospitality
Rates: Fixed at Treasuries plus 1.30%-1.45% spreads
Term: 5, 7, or 10 years (plus a 15/15 option)
LTV: 50% LTV
Underwriting: 11%-15% Minimum Debt Yields, depending on property type
Recourse: Non-Recourse typically
Prepay: Yield Maintenance
Recent Financings
50k SF Industrial Logistics Hub
Portland, Oregon
$10,725,000 Cash-Out Refinance
Lender: Credit Union
- 55 lenders pitched
- 65% LTV, 1.25x DSCR
- 5.50% 5-Year Fixed Rate
- Locked at Signed LOI
- 3,2,1,0,0% Stepdown Prepay
Self-Storage Construction
Reno, Nevada
$12,513,000 Construction Loan
Lender: Private Fund & Life Co. syndicate
- 71 lenders pitched
- 70% LTC
- 2 year term plus ext. option
- Fixed Rate w/ special release provisions
Lender Notes
Fannie Mae & Freddie Mac are offering competitive rates in the low-5% (with buydowns) to low-6%'s. Buydowns have remained an accretive solution to increase loan proceeds by 2-3% net of the buydown cost.
Life Companies have slowed down for 2024 closings, but are expected to pick up activity in the new year with their new loan allocations for 2025. They remain open to being creative on prepay structures and pre-stabilized multifamily properties in lease-up.
Banks and Credit Unions are generally underwriting between 1.20x-1.25x DSCRs. While many banks are setting rate floors, credit unions are currently competing very well on rates and prepayment penalty flexibility.
CMBS has become a viable lending option to maximize loan proceeds and interest-only with buydown options.
Bridge Lenders are underwriting their take-out more rigorously, however remain active with spreads generally in the low-300's to mid-400's over Term SOFR, which continues to fall.
Preferred Equity sources have remained active. Certainty of execution remains important. General market terms remain at 7%/14%, with some outliers as low as 12% for larger strong deals.
Construction Lenders are being selective, with a focus on core markets. Most banks are at 55-60% LTC, while non-recourse Debt Funds have competed well for higher leverage requests in the 70-80% LTC range.
Lender
Max LTV
Rates
Closing
Notes
Fannie/Freddie
5,7,10-Year Fixed
80%
5.0% - 6.25%
(buydowns available)
45-50 days
LTV & DSCR dependent
FHA Refinance
35-Year Fixed
85%
5.0% - 5.60%
120-150 days
not including MIP
Life Insurance
Companies
65%
5.25% - 6.0%
45-50 days
DY dependent
Bank, CMBS, &
Credit Union
70%
5.50% - 6.75%
45-60 days
DY & term
dependent
Bridge
Debt Funds
75%
7.0% - 9.50% +
Spreads of 2.75%+
14-45 days
LTC & stabilized DY dependent
Construction
Lenders
55%-80%
7.50% - 9.25% +
45-60 days
LTC & size
dependent
Tim Gerlach, CPA | Principal
CPA Lic. 130463 | Broker Lic. 02038912
Direct: 323-505-9222