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Lenders Widening their Pricing in the August 2015 Commercial Real Estate Market

Tuesday, August 18, 2015

The heat of August has again provided some volatility in the capital markets. Although a few select lenders have shown signs of pulling back the reigns, the bulk of lenders remain very active and focused on making competitive loans through the end of the year. The most significant capital markets shift has come from a widening of investment grade corporate bonds. Below is a summary graph showing this year's movement in 10-year average investment grade corporate bonds and 10-year U.S. Treasury yields.

2015 Spread Proxy

The yield on the 10-year U.S. Treasury rose by approximately 30 bps in the middle of the summer reaching a height of 2.44 percent; the repercussions of recent international market turmoil and a flight to safety have brought that yield back below 2.20 percent. The capital markets are an ever fluid marketplace and changing every day. We expect an increasingly selective lender pool through the next couple of months, until we get closer to the New Year.

Additional Investment Metrics for Commercial Real Estate

Lender spreads and all-in-rates have a direct correlation to investment grade corporate bonds, as these bonds are an alternative investment vehicle for life insurance companies and CMBS bond buyers. While lenders don't exactly benchmark to corporate bonds, they are a key component to lenders establishing mortgage spreads over U.S. Treasuries. Many of our life companies have shared with us that they typically take the average investment grade corporate bond minus approximately 70 basis points (bps), or 0.70 percent, to establish a proxy for spreads in the market (see the graph below). Monthly average investment grade corporate bond spreads increased roughly 25 bps between August and May. More specifically, the average proxy spread has average 120 bps this week, a 22 bp increase from the first week of August.

Average Investment Grade Bonds

Some life companies have reached their allocations for the year and are already focused on 2016 business. The remaining active life company lenders are quoting spreads 20-25 bps wider than earlier this summer. CMBS lenders have widened their spreads by roughly 30-35 bps, a result of corporate bonds widening and an increase in the supply of CMBS bonds. The agency lenders, Freddie Mac and Fannie Mae, have been focused on freeing up capital for workforce and lower income properties, but they have continued widening their spreads for traditional market rate deals with higher market rents, as each lender is pushing up hard against their $30 billion cap for the year ($60 billion combined). Agency pricing will remain volatile until we step into the fourth quarter and they can shift the deals into next year's allocation.

Reach out to any of our debt placement and equity placement professionals for the best guidance and most current capital markets information.

Information provided by HFF Denver, recognized as the No. 1 Commercial Mortgage Company by the Denver Business Journal. 

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