Q1 Capital Markets Update
Lenders Remain Optimistic
Even amid inflation and Omicron worries, lenders remain active and optimistic towards deal-making. As of late, lenders are making pricing and loan proceeds exceptions in an effort to compete and win loan placements. Additionally, extra interest-only periods have become a way some lenders are differentiating. For value-add deals in growth markets, such as Phoenix, debt funds and bridge lenders are underwriting more conservative rent growth and focusing on property basis metrics, both per unit and per square foot. Telling a compelling story and showing a strong collections history continues to be two of the most important factor in negotiating for best terms.
Rate and Economic Indicators
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10 Year Treasury up to 1.84% from 1.57% at the start of October 2021: Highest level since January 2020. Bloomberg rates term projects 2.0% by end of this year.
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LIBOR and SOFR flat at 0.10% & 0.05%: 1 & 2-Year LIBOR Forwards at 1.06% and 1.66%, up substantially from last quarter expectations.
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Economy added 199k jobs last month, vs. 450k forecast.
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Unemployment rate dropped to 3.9%, but largely impacted by weak participation rate. With a pre-pandemic participation rate, this equates to 6.3%.
Recent Financings
393-Unit Value-Add
Two-Property Portfolio
El Paso, TX
$26 Million Bridge Loan
Debt Fund execution
78% LTC, non-recourse
3.10% spread - 0.25% Libor Floor
$1.8 Million CAPEX future funding
49-Unit Value-Add
Kansas City, MO
78% LTV "Quasi" Bridge Acquisition
Freddie Mac w/ affordability waivers
3.63% rate locked at signed App
5-Year Fixed, 1-Yr Interest-Only
Stepdown prepay open after Yr. 2
30-Unit Refinance
Astoria, OR
65% LTV Cash-Out Refinance
Credit Union execution
2.89% rate locked at signed App
5-Year Fixed, with 5-year fixed re-set
No Prepayment
Rates Today
Fannie Mae & Freddie Mac continue to reward affordable and green deals with 10-40 basis point discounts in rates.
Life Companies are competing with permanent financing pre-stabilization and early rate locks.
Banks and Credit Unions remain competitive for shorter fixed terms, with some offering up to 5-years interest-only.
Construction Lenders are focused on Sponsorship experience and a strong guarantee and GC track-record.
Lender
Max LTV
Rates
Closing
Notes
Fannie/Freddie
10-Year Fixed
80%
2.85% - 3.35%
45-60 days
LTV & DSCR dependent
Fannie/Freddie
10-Year Floating
75%
2.50% - 2.75%
45-60 days
LTV & DSCR dependent
FHA Refinance
35-Year Fixed
85%
2.95% - 3.40%
120-150 days
includes MIP
Life Insurance
Companies
75%
2.75% - 3.30%
40-50 days
DY dependent
CMBS, Bank, &
Credit Union
75%
2.95% - 3.60%
45-60 days
DY & term
dependent
Bridge
Debt Funds
80%
3.0% - 5.25% +
14-45 days
LTC & stabilized DY dependent
Construction
Lenders
80%
3.25% - 4.75% +
45-60 days
LTC & size
dependent
Breaking It Down - "TIPS" (Treasury Inflation-Protected Securities)
Comparing the 10-Year TIPS rate with 10-Year Treasury notes can be valuable in understanding how the market views future inflation, and ultimately how it may impact rates. The "TIPS spread," or "breakeven inflation rate," can be a valuable predictor in understanding what the Fed may do with rates and the current pace of tapering. If that spread widens, the Fed will be more likely to accelerate the pace of tapering to curb more inflation, meaning higher rates more quickly. While other factors like the jobs report play into the Fed's decision-making, understanding the inflation picture can shed light on real-time property financing decisions, including:
- How quickly do rates need to rise for fixed debt to make more financial sense than floating rate debt?
- When will lenders provide rate locks?
- Does it make sense to purchase a rate forward to lock in a refinance rate now while delaying a payoff due to an expensive prepayment penalty?
- What is the ideal prepayment penalty timeframe for the business plan and what lending sources can provide that?
Tim Gerlach, CPA | Principal
CPA Lic. 130463 | Broker Lic. 02038912