Like the first film produced by Mel Brooks, players in the commercial real estate market are very anxious. Interest rates are high, costs are high, and inflation is high – worrying not just homebuyers, but also commercial real estate investors, lenders, general contractors and brokers.
The alarming pace of rising interest rates is the most unfortunate consequence of the Fed’s fight against inflation. Not only have rates risen to the point of choking off the capital that was fueling the voracious appetite of commercial real estate investors, but spread volatility has made it nearly impossible for conduit/CMBS lenders to hold quotes.
Banks and life insurance companies have the advantage heading into the second quarter. Banks are still holding depositors’ money at close to zero, but charging more on commercial real estate loans due to the expectation that rates will continue to rise.
In the world of commercial mortgage-backed securities, rates are much more volatile. Not only do Treasuries move daily, but spreads are also widening. In recent issues, 10-year AAA bonds traded 120-130 basis points (1.20%-1.30%) above the benchmark. This is a significant increase from the average for 2021 and from January this year, when AAA bonds traded over 70 basis points (0.70%). As a result, all-inclusive rates are in the mid-5% range for most conduit transactions.
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By comparison, insurance company spreads have widened by about 0.15% to 0.25% over the past four months, according to the John B. Levy & Co. Inc. Commercial Mortgage Survey. .. The combination of Treasury and widening spreads has rates in the range of 4.35% to 4.75% for transactions funded by life insurance companies, which is roughly in line with the bank quotes.
The odd thing is that most investors would agree that the economy appears to be on decent footing. The unemployment rate is very low by historical standards and almost at pre-pandemic levels. Consumers continue to spend and manufacturers continue to grow. GDP was negative in the first quarter, but most of that was due to lower government spending.
John B. Levy & Co. partner and investment banker Andrew Little can be reached at [email protected]