The volatility in the market over the past several weeks that caused the 10-year U.S. Treasury yield to drop by ~40 bps had a significant impact on interest rates for commercial real estate debt. Utilizing the services of a mortgage banker with strong lender relationships is especially important in a volatile lending environment like this where reliability, certainty of execution and access to a wide variety of capital sources are critical.
Why Gantry?
Our extensive capital network includes life insurance companies, agencies (Fannie Mae, Freddie Mac, and HUD), banks, credit unions, CMBS, and private debt funds. We save you time and money by clearing the market and fostering competition among lenders to secure the best possible rates and terms. The summary below contains a snapshot of the current state of the debt markets from the viewpoint of various capital sources.
Life Insurance Companies – Life insurance companies set interest rates based on the Treasury index for the applicable loan term plus a risk premium. Despite recent drops in Treasury yields, they continue to offer competitive rates for loans with 65% LTV or less. Recent volatility has led to a 10-15 basis point increase in spreads, though rates remain 50-75 basis points lower than banks. Life companies behind on origination targets may offer more aggressive rates.
Life companies establish their spreads for commercial mortgages with an eye on corporate bond yields. Corporate bonds serve as an investment alternative for life companies, which seek to achieve a higher yield on commercial mortgage investments due to the greater risk premium of commercial real estate. Consequently, when corporate bond yields increase, life companies typically raise spreads on their commercial mortgages. This scenario played out over the past several weeks, resulting in most life companies increasing their spreads by 10-15 basis points, although their rates remain 50-75 basis points lower than those offered by banks. In general, life companies that are behind on their origination targets for the year are likely to be more aggressive, while those that are on target (or ahead) may institute rate floors and/or widen spreads in volatile markets. Currently, rates in the low-5% range are available from life companies for low-leverage loans on high-quality multifamily, industrial, or grocery-anchored properties in primary markets with strong sponsorship.
Agencies – Fannie Mae and Freddie Mac remain active in the multifamily sector. They set rates based on the Treasury index plus a spread and are particularly interested in properties with an affordability component. Since Fannie Mae and Freddie Mac are behind on their origination targets for the year, they are actively looking for business (particularly properties with an affordability component). For 100% affordable multifamily properties, rates in the low-5% range are available.
Banks/Credit Unions – Banks and credit unions typically price their loans based on quoted rates. Their objective is to set their interest rates above their cost of funds for deposits. When there is a significant drop in the yield on U.S. Treasuries, banks and credit unions are cautious about following the market too closely by making large adjustments in their fixed-rate pricing due to the short-term variability of their cost of funds. For instance, the best pricing from banks and credit unions in the current market is in the +/-6.00%-6.25% range.
CMBS – CMBS pricing is based on the SOFR swap rate or Treasury index that corresponds to the loan term plus a spread. CMBS spreads are subject to change based on volatility in the capital markets throughout the loan closing process, and the interest rate is not locked until loan closing. The benefits of CMBS financing are the potential for maximum interest only payments (full-term interest only is often available) and maximum loan proceeds. Currently, mechanisms such as rate buydowns and sizing loan proceeds to a minimum DCR (as low as 1.25x DCR for multifamily) using interest only payments are being used to maximize loan proceeds. Although maximum loan proceeds and interest only are possible with CMBS financing, the thing to remember is that the interest rate and deal terms are not set in stone until loan closing.
Private Debt Funds – Private debt funds offer floating rate pricing based on the 1-month Term SOFR index plus a spread; they can also offer fixed-rate pricing. Depending on the deal profile (property type, leverage, business plan, etc.), spreads range from 2.75%-5.50% currently. This equates to all-in rates in the 8.05%-10.80% range.
It has been good to see market leading rates drop back into the 5% range. The potential for market volatility remains, especially in election cycles. We’ll stay tuned and available as our clients’ ever-present needs arise and offer market leading terms.