CRE Thought Leadership

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.

Periodically, RRA will provide a brief snapshot of what we are seeing in the commercial real estate market in order to educate our clients and investors. Q3 2018 represents a poignant time in which to kick this initiative off, as interest rates and uncertainty are increasing and interest in alternative investments such as CRE are continually on the rise.

Summary

CRE values appear to be peaking but it’s not looking like a bubble as leverage remains conservative and the economy is healthy. The fundamentals are good but few are expecting large further increases in rent and values. Transaction volume is down and it will be interesting to see if there are enough compelling investments out there in order to put the sizable dry powered raised to work. The rising interest rate environment can have both positive and negative effects on CRE and we are watching this closely. Investors looking for additional security along with current income are finding a fit with CRE debt.