By Michael Seton, executive vice president of Investments and Advisory, Carter
NEW YORK (Oct. 19, 2011) – At Carter, we keep a close eye on capital markets. The commercial real estate finance market has seen a significant negative jolt over the past four months – the significant sell of the public equities and fixed income markets has had a correspondingly negative effect on the U.S. real estate debt markets.
By way of example, in April 2011, AAA CMBS spreads were approximately 175 basis points over the 10-year swap rate but had backed up to over 300 bps over the equivalent swap rate in early October 2011.
On a typical 60 percent loan-to-value loan, the coupon can be well in excess of 6 percent (versus sub 5 percent previously). Despite Treasuries bonds dropping to all-time lows, lenders haven’t necessarily dropped their absolute rates, which has led to spread widening to levels we only observed at the depths of the financial crisis in 2008 and early 2009.
Borrowers are turning to balance sheet lenders in droves because the risk of the bond markets widening further is too great. The challenge for borrowers is that insurance companies put out big dollars in early 2011, and are, as a result, largely getting full on quota.
Banks remain under pressure from both residential mortgage woes (as evidenced by the constant headliners in the Wall Street Journal and The New York Times) and capital and other regulatory requirements, and as result remain reluctant to aggressively lend.
Until the European crisis is resolved (which likely won’t occur until more pain is endured, including the inevitable Greek default), we will continue to see volatility and lack of confidence by lenders in the real estate finance world.