All eyes are on Wednesday’s Federal Reserve meeting to see if they will begin this year to increase interest rates. Whatever they decide, it may have only a modest impact on borrowing costs for commercial real estate loans. The Federal Reserve may choose to increase the Federal Funds Rate, (the rate, according to Wikipedia, “at which depository institutions (banks and credit unions) actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis.”). However, commercial real estate loan interest rates, either through bank, agency, CMBS or life insurance sources, are more closely tied to the yield on 10 year treasuries. And historically the yield on 10 year treasuries has been only loosely tied to the Federal Funds Rate.
Fannie Mae’s October 2015 Economic Forecast predicts that the Federal Funds Rate will rise from .1% today to .3%, .5%, .6% and .8% in Q1 through Q4 of 2016, respectively. But they expect the yield on 10 year treasuries to rise from 2.1% today to 2.2%, 2.2%, 2.3% and 2.4% in Q1 through Q4 of 2016. In short, their forecast is for the Federal Funds Rate to rise by 70 basis points and the yeild on 10 year treasuries to to rise by only 30 basis points. More info is available at http://www.fanniemae.com/resources/file/research/emma/pdf/Economic_Forecast_101615.pdf. If that holds true, even if the Fed begins to raise the Federal Funds Rate, rates on commercial real estate loans can be expected to rise only modestly in 2016.
That said, rates remain near historical lows and no one is expecting rates to go down. And a 10 to 30 basis point increase in borrowing cost for a multi-million dollar commercial real estate loan can have a significant impact on cash flows. So locking up long term borrowing costs on apartment and commercial properties now just makes good sense.
Rates have dropped for multifamily loans as lenders compete aggressively for new business. Lenders are offering rates as low as 3.58% for 10 year fixed, 3.45% for 7 year fixed and 2.78% for 5 year fixed on multifamily loans of $1 million or more in many markets throughout California. Underwriting remains tight and not all properties will qualify. But these are the lowest rates we have seen in months and given widespread expectations that the Federal Reserve may start to increase interest rates later this year, offer an excellent opportunity for multifamily investors to lock in low rate and improve cash flows.
The yield on 10 year treasuries fell to 2.19% for the week ending October 17, the lowest level of the year. They rose slightly last week to 2.25%, but still the 10 year yield is well below the high for the year of 3.01%. Treasury yields have been falling since mid-September. Yields on 7 and 5 year maturities have followed a similar pattern, as can be seen in the following chart.
This is good news for for investors in commercial and multifamily real estate because rates on commercial loans tend to move up and down with treasury yields. We have seen lenders drop rate in recent weeks. And we have seen some lenders waive or reduce fees to entice investors to take out new loans before year end. The result is that some of the most attractive deals of the year are now available.
We have been seeing a slight drop in rates over the past few weeks, with some clients closing at rates 10 to 20 basis points lower than they had been quoted in Letters of Interest just 30 days ago. Rates on commercial and apartment property loans tend to rise and fall with treasury yields. Below is a chart of treasury yields since January of 2013.
The yield on 5, 7 and 10 year treasuries fell this week. This is good news for apartment and commercial property investors because rates on commercial mortgages generally rise and fall along with treasury rates.
For example, the yield on the 10 year treasury fell to 2.69 on January 29, down from its peak of 3.01 in December. Compared with where we were 12 months ago, rates are up 62 basis points for 5 years, 75 basis points on 7 years and 66 basis points on 10 years. Compared to 6 months ago, rates are up 15 basis points on 5 years, 15 basis points on 7 years and 8 basis points on 10 years.
We are seeing similar changes on rates quoted on lenders on apartment and commercial properties. While rates are up from 60 to 75 basis points from a year ago, they remain near historic lows.
|Maturity||Jan 29, 2014||52 Wk High||52 Wk Low||6 Mths Ago||12 Mths Ago
|10 Year ||2.69||3.01||1.70||2.61||2.03
From Apartment Finance Today…
By Brad Berton
We all knew the ultra-low mortgage rates seen over the last couple years wouldn’t last forever. Still, the recent rise of a full percentage point over a two-month period left even the steeliest of apartment professionals reaching for their Pepto-Bismol.
From early May to early July, the benchmark 10-year Treasury yield, against which lenders quote most fixed-rate loans, shot up more than 100 basis points (bps), from about 1.6 percent to more than 2.7 percent. Meanwhile, lender spreads—the amount a lender adds to the benchmark to produce a final interest rate—have also widened gradually over the course of the year.
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Last week we saw several lenders drop their rates 10 to 20 basis points on multi-family and commercial property loans. However, rates remain 25 to 40 basis points above what were available in May and earlier in year. Rate had risen almost 50 basis point in early June when Fed Chairman Bernanke announced possible scaling back of “quantitative easing” later this year. Swap rates, which directly affect the rates bank lenders are able to offer 3, 5, 7 and 10 year fixed rate loans, tell the story. For example, the 7 year swap rate, as reported by the Federal Reserve, had been hovering between 1.30 and 1.60 in January through May. They began rising in May and peaked at 2.37 in early July. They have since declined to about 2.10.
The 7 year swap rate, as reported by the Federal Reserve, is now at 1.74, a rise of 45 basis points from early May. Interest rate swaps are used by banks to exchange the fixed rate income they receive from commercial mortgage loans for floating rate income that better matches their deposit liabilities. A rise in swap rates directly impacts the fixed rate they can offer on commercial mortgages. The 7 year swap rate has been below 1.4 since the middle of 2012. As a result, we are seeing rate quotes from lenders move higher in recent weeks.