In December 2018, RRA Capital conducted an annual mortgage broker survey to explore how interest rate pricing changes at different leverage points for a typical commercial real estate (CRE) bridge loan. The inspiration for this survey came from the desire to give borrowers the sharpest pricing we can at different LTV exposures by getting a better idea of current market pricing.
For the purposes of this survey, a “typical commercial real estate bridge loan” was assumed to be the following:
- Debt Assumptions: Acquisition financing, non-recourse, 2-year term
- Property Assumptions: General multi-tenant commercial property, class B, partially-stabilized, $15 million value
- Borrower Assumptions: Has experience in the product type, good credit, an acceptable net worth as limited guarantor and ability to accept leverage between 40%-95% LTV
- Market Assumptions: Well-located, infill location, in a stable secondary market
The below chart displays the survey results, which came from some of the most active mortgage brokers across the United States. The black bold line in the middle is what RRA extrapolated to be a good average rate (internally referred to as the “Yield Curve”). More specifically, the black line is the exponential trend line of the rate of change between the data points. And to control for some outlying data, any data points where either the rate of change or the rate of acceleration were more than two standard deviations from the mean of the sample were excluded.
The Yield Curve is presented by itself below:
Below are some of our observations of the data:
The Rate at Which Interest Rates Rise Accelerates at Higher LTVs
The data (as shown in the table to the right of the chart above) shows that interest rates rise only slightly at the lower LTVs, but the increase accelerates at the higher LTVs. This makes sense because as the LTVs increase, potential loss of loan principal increases materially. For example, the difference in an investor’s yield requirement between 75-80% LTV is larger than 40-45% LTV because higher leverage points are more sensitive to changes in value and therefore riskier. The difference in risk between a 40% and 45% LTV loan is quite small because it is rare that a property loses over half its value so both of those LTVs have similar security. In fact, many survey respondents didn’t assign any increase in rate between lower LTV points since the increase in risk can be so minimal. However, the closer a loan gets to 100% LTV, the faster rates rise and approach returns required by equity holders. At 100% LTV, the risk is effectively that of equity and returns should mirror equity returns.
Certain Property Types Would Likely Start Higher and Accelerate More Rapidly
This survey is agnostic to specific property types (e.g. multifamily, retail, office). Our guess is that if we did break it down by property type, rates start higher and accelerate more rapidly for property types with more historical volatility, such as hospitality and certain retail. Alternatively, they would be cheaper and a bit flatter for more stable assets such as multifamily and CBD (central business district) office.
The Slope of the Yield Curve Has Flattened
Compared to earlier iterations of this survey, we have found that as this cycle has progressed, the slope of the yield curve has flattened a bit. The reason for this is likely because investors have found it more and more difficult to hit their targeted yields. As a result, they have migrated towards the higher end of the risk spectrum and driven down the high LTV yields relative to lower ones.
Highest LTV’s Rates May Be Unreliable
The data points are much more uniform at lower LTVs, say from 40% - 75%. After that, the data gets a bit erratic. This is likely because few mortgage brokers surveyed are seeing financing in the 80% - 90% LTV range and they may not have a good grasp on pricing in that range. These higher LTVs are more in the realm of hard money lenders, which isn’t where RRA plays either.
Thank you to all of the mortgage brokers who participated in this survey. We hope you found these results as helpful and interesting as we did. We’d like to update this periodically to see if/how the data changes. When we do, we’ll make sure to share the results here on our blog. Be sure to subscribe at the top right hand of this page to receive alerts for new articles.
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