Like the first movie Mel Brooks produced, commercial real estate market participants have a case of high anxiety. Interest rates are high, costs are high, and inflation is high – all of which are causing anxiety for not only homebuyers, but also commercial real estate investors, lenders, general contractors and brokers.
The alarming rate of the rise in interest rates is the most unfortunate consequence of the Fed’s fight against inflation. Not only have rates risen to the point of choking capital that was feeding the voracious appetite of commercial real estate investors, but spread volatility has made it almost impossible for conduit / CMBS lenders to hold quotes.
Banks and life insurance companies have the advantage going into the second quarter. Banks are still holding depositors’ money at a rate near zero, but are charging more on commercial real estate loans because of the expectation that rates will keep spiking.
In the commercial mortgage-backed securities world, rates are much more volatile. Not only are treasuries moving every day, but spreads are also gapping out. In the last few offerings, the 10-year AAA bonds traded at 120-130 basis points (1.20% -1.30%) over the benchmark. That is up significantly from the 2021 average and from January of this year, when AAA bonds traded closer to 70 basis points (.70%) over. As a result, all-in rates are in the mid 5% range for most conduit transactions.
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By comparison, insurance company spreads have widened about .15% to .25% over the past four months, according to John B. Levy & Co. Inc. Commercial Mortgage Survey. The combination of Treasury and spread increase has rates in the 4.35% to 4.75% range for life insurance company financed deals – roughly in line with bank quotes.
What’s odd is most investors would agree that the economy appears to be on decent footing. The jobless rate is very low by historical standards and almost at pre-pandemic levels. Consumers are still spending, and manufacturers are continuing to grow. GDP was negative in the first quarter, but most of that was because government spending was down.
John B. Levy & Co. partner and investment banker Andrew Little can be reached at firstname.lastname@example.org.