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RE: Annual Newsletter Dear Friend: The 2007 commercial mortgage market opened on a very positive basis. Abundant financing was available from all major sources with many offering unbelievably liberal rates and terms. During March the positive turned negative as the continued decline of the housing market and the related "sub-prime" residential capital market (RMBS) melt down caused a major loss in investor confidence that led to the current "credit crisis". By July the loss of investor confidence carried over to the commercial mortgage capital market (CMBS) causing it to virtually disintegrate for the balance of the year. Since then the questions for commercial mortgage borrowers, lenders, mortgage bankers, brokers and investors have been; when will the crisis end, what lenders are currently in the market, what are their underwriting criteria, what are current interest rates and rate spreads and where are they and the economy headed? Accordingly, as we enter 2008 we wanted to write and share our thoughts about what we foresee for the commercial mortgage market, the economy and interest rates. As predicted in last year's newsletter, the "Fed" remained "neutral" while monitoring inflation until August when economy concerns, caused by the continued housing market decline and sub-prime mess, it was forced to lower the Fed Funds rate by 50 basis points and add liquidity to the credit markets. Two more 25 basis point reductions followed. While the "Fed" did not act to "bail out" the adversely effected lenders and borrowers, the situation became so large that the impact on the entire economy had to be addressed. In an unprecedented move on January 10th Fed Chairman Bernanke announced that they will be lowering rates further and are poised to take whatever actions are necessary, including further rate reductions, to try to avert a recession. They next meet on January 29th. On the economic front the economy is still buoyed by consumer spending, but, December retail sales were less than hoped for as consumers appear to be nearly "maxed out" on their credit. Therefore, one must wonder how long economic growth can continue if 70% is attributed to the consumer. The unemployment rate jumped to 5%. The manufacturing index declined and crude oil went over $100 a barrel. Many economists are now fearing a recession. Just the fear of an impending recession can impact consumer spending, employment, business investment and economic growth. Such fear also has President Bush talking about stimulus measures including a tax cut. Rapid action is required if they are to be effective. As over 50% of the RMBS and CMBS market investors have ceased purchasing mortgage backed securities rate spreads and "cap rates" rose dramatically. Though spreads increased by over 150 basis points, pricing existing or proposed mortgage securities has almost become impossible. While the capital markets search for stability and an acceptable "market price" many lenders are forced to write down the value of their holdings. Simultaneously most CMBS-conduit sources have become unable to assemble and sell a pool of new securities effectively minimizing what was the largest source of long term commercial mortgage financing in the country. The source was abused by its participants and those abuses need to be corrected in order for it to reappear as a dominant source of permanent mortgage financing. While that will occur over time, in the interim borrowers are alerted to be cautious as a number of conduit lenders are quoting loans to keep their pipeline of business open but are not really closing deals. The old adage "If it sounds too good to be true, it probably is" appears applicable. With such turmoil in the capital markets it is interesting to reflect on the reactions of the benchmark 10 year Treasury rate and 30 day LIBOR rate. The 10 year treasury opened last January at 4.68%, hit 5.26% in June, dropped to 4.34% in September, rose to 4.71% in October, reached the mid 3% range in December and ended the year at 4.02%. LIBOR opened the year at 5.32% was volatile and ended the year at 4.60%. LIBOR is currently out of "sync" with the Fed's rates. As housing finance is now often tied to LIBOR the Fed is moving to influence lowering LIBOR. While mortgage rate spreads increased substantially, a 10 year balloon mortgage in January could have been secured at between 5.53% and 5.93%. That same loan could have been secured in September or December at a rate between 5.85% and 6.24%, an average increase of only about 30 basis points. The good news is that insurance company lenders have not been affected. They remain very active in the long term commercial market although they too increased their rate spreads and became more selective. They are financing substantially leased existing office buildings, apartments, retail projects, industrial buildings, flex buildings and sundry income producing real estate in amounts up to 75% of appraised value. They continue to offer fixed rates for 5, 7 and 10 year balloon type loans with 25-30 year amortizations while also offering 15, 20 and 25 year self liquidating loans. Some are initially imposing "floor rates' of 6%. Lower short term rates competition and loan volume will ultimately impact that. The "agencies" FNMA and FHLMC are also active in the permanent apartment financing market. Commercial banks are funding interim and construction loans. Mezzanine loans are still available for the right situation at the right price. On a selective basis, combination fixed rate construction-permanent mortgages are available at insurance company rates for loans above $10,000,000. During 2008 loans will be more difficult to obtain but financing for acquisitions, repositionings and refinancings will be available at very reasonable and competitive rates. Financing for a "to be built" property will require significant pre-leasing. A "spec" proposal will require strong borrower equity and substantial personal guarantees. The best rates will still go to the investment grade rated, long term credit, situations and to superior quality apartments. As guidance, outlined below are the current ranges of rate spreads over the corresponding U S Treasury rate for existing, substantially leased income property that the insurance companies and active CMBS sources are quoting for typical long term permanent mortgages;
Subjectively, our insurance company correspondents; Thrivent Financial for Lutherans, GreatWest Life, Canada Life and Shenandoah Life all have plans to commit and close a substantial amount of commercial mortgages during 2008. Therefore if you, a friend or client are thinking of financing during 2008 we believe that long term rates will be available in the very acceptable range of 5.65 % to 6.50%. I hope you will take advantage of our vast increased resources and years of expertise and call Ed Brown, Rick Devine, Brenner Green, Charles Harmar, Bob Jacoby, Steve Pettit, Bruce Robertson or myself to discuss any potential financing needs. Happy New Year. Sincerely, PRO-GRESSIVE MORTGAGE CORP. |
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RE: Announcement newsletter Dear Friend: U.S. Realty Capital ("USRC"), a division of Philadelphia Private Capital, LLC ("PPC") is pleased to announce the acquisition of Progressive Mortgage Corporation ("PMC") effective August 2007. PMC is a commercial mortgage banking company that was formed in 1972. It has been servicing its customer base in an exemplary fashion for over 35 years. Presently, PMC services over $200.0 million in loans for four life insurance companies. PPC/USRC is also pleased that three executives from Progressive are remaining with the new team to include Bruce Coin, Sr. Managing Director; Allen McConnell, Director; and, Howard Pollard, Vice President and Servicing Manager. It is an interesting time in our industry due to the ongoing turmoil in the CMBS/Conduit Capital Market (AKA the MBS/mortgage backed securities market). We have seen tremendous rate spread increases over the past 8 weeks. Therefore, we thought this would also be a good time to address what we envision for the commercial mortgage financing market for the next six months or so. The present disruption and uncertainty in the MBS market was caused by a significant increase in sub-prime residential mortgage defaults. Accordingly, a number of hedge funds become "insolvent", mortgage companies and investment bankers closed or sold off divisions, credit lines to such sources were terminated or reduced and more conservative underwriting and security requirements have been imposed by the rating agencies for new offerings . Investor confidence in the securitized mortgage debt market has deteriorated substantially. Concerns about the quality and liquidity of existing MBS securities caused numerous investors to withdraw from this market creating a "liquidity" crisis. MBS holders could not find buyers. Prices (interest rates) became unstable. As all securitized debt is traded and funded in the capital markets when investor confidence diminished, demand for any type MBS debt declined significantly. This led to instability in the Capital Markets and dramatic increases in the interest rates and spreads of MBS debt. To re-attract investor-buyers rate spreads increased by as much as 200 basis points or more. There is no question that this fine source of financing became too liberal and was abused. As a result we believe that it will take some time for many investors to regain full confidence in purchasing MBS debt. Until that occurs MBS pricing should remain well above previous levels. Investors will more carefully review the analyses and supporting information of each loan and how the rating agencies rate such new MBS proposals. The rate spread efficiency, i.e., the extremely low rate spreads and liberal loan underwriting available prior to this summer may only return after a new track record of conservative underwriting and low default has been in evidence for at least 6 months and possibly much longer. The now higher rates of formally AAA rated RMBS and CMBS securities has impacted every type of commercial real estate financing as well as "cap rates". The good news is that the insurance companies that are portfolio lenders continue to provide abundant amounts of commercial real estate financing. The "agencies", FNMA and Freddie Mac, are also active but only in the apartment sector and at rates similar to insurance company rates. Until the MBS market recovers both sources will be providing commercial mortgage loans at lower rates and spreads than CMBS sources. To attempt to stabilize the market and lessen concerns of a liquidity crisis the Federal Reserve promptly reduced the overnight discount rate making it less expensive for major commercial banks to "borrow at the window" increasing the availability of lower cost capital to the market. The "Fed" also purchased a substantial amount of existing securitized debt adding further liquidity. In addition, at its meeting of September 18th the Fed reduced the fed funds rate by a full ½% sending a strong message that they are sensitive to the credit needs of the economy and that they want to try to prevent a possible recession. More action may by in order at their next meeting of October 30th. The other good news is that U.S. Treasury rates, and in particular the benchmark 10 year treasury rate, have again declined. After hitting this year's high to date of 5.20 % in mid-June the 10 year has declined by about 60 basis points to about 4.60%. As guidance, for financing an acquisition, a repositioning, a refinancing, to expand a property or to create a new project, below are the current rate spread ranges we are seeing for a 10 year fixed rate permanent balloon mortgage for the basic property types:
In addition, joint venture, mezzanine, bridge, construction-permanent and true equity financings are all available through our sources. As you review your financing needs for the next six months we hope the foregoing will aid your planning. As always if we can aid you in any way, please call us or any of the production staff: Bruce Robertson, Brenner Green, Allen McConnell, Charley Harmar, Rick Devine, Steve Pettit, or Tom Greenwood. Sincerely, Pro-Gressive Mortgage |
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RE: NEWSLETTER Dear Friend: 2007 should prove to be another very interesting year. Accordingly, and as is our custom, we wanted to write and share our thoughts about the economy and what we foresee for the commercial mortgage financing market as we head into the New Year. During 2006 the FMOC raised short-term interest rates 5 times, oil prices skyrocketed then fell during the Fall, and housing starts, auto sales and industrial manufacturing declined. By late summer the economy began to slow but employment held fairly firm with an approximate 4.5% unemployment rate. Non-manufacturing and consumer spending remained good but recently appear to be slowing. Year end retail sales, while up, were not as strong as projected. As predicted early last year, the “Fed” at its August 2006 meeting, “paused” from raising rates further. They have remained in the “pause” or neutral position since then despite the current core rate of inflation (excludes energy and food) remaining above their 2006 targeted level. The “Fed” has been relying upon the economic slowdown to bring the core rate in line with their target rate. As of this writing, they have not announced their target inflation rate for 2007. If the current economic slowdown has the desired effect, they should continue to refrain from increasing rates. If the downturn in housing has a more negative impact than currently estimated rate reductions may be in order later this year. It is interesting to note, in light of the “Fed’s” five rate increases, that the benchmark ten-year Treasury ended the year at 4.69% which was only 38 basis points higher than the year’s lowest rate of 4.31% of last January. The high for the year was 5.22% reached at the end of June and again early in July. The 4.69%, however, was higher than any 10-year rate experienced at any time during 2005. As the economic news “du jour” continues to be inconsistent, the obvious questions are; will the economy slip into a recession during 2007 and if not, recognizing that 2008 is a presidential election year, will a recession occur then or thereafter? Presently, it appears as if the economy will slow but continue to grow during the year but at a more moderate pace. Current thinking is that GDP will grow at a reduced annual average rate of approximately 2.5% which is down from the 2006 GDP growth rate of approximately 3.4%. Recent job gains and rising wages probably reflect economic growth that should cause the “Fed” to refrain from reducing rates in the near term. The “wild cards” are always oil prices and inflation. For commercial financing purposes, it appears as if 2007 will be very similar to 2006. There will again be a tremendous amount of capital available to finance real estate and at very good rates and terms. The insurance compaines, FNMA, Freddie Mac, CMBS and similar long term lenders should continue to price long term mortgages for “immediate” 60-90 day fundings at rate spreads in the general range of about 95 to 150 basis points over the corresponding Treasury. The rate spread will vary depending upon deal quality, ratio to appraised value, credit and other criteria. The standard 10 on 25 or 10 on 30 immediate funding permanent mortgage will be readily available for well leased properties. As lender competition should be strong, many long term lenders will also offer loans with an “interest only” portion. 15, 20 and 25 year self-liquidating mortgages will also be available from Insurance companies. On a select basis they will also offer “future take outs” for up to 12 months with exceptions going beyond. Initially their spreads may be a little higher than CMBS and agency spreads but this could change depending upon deal competition. As the CMBS markets continue to improve their efficiency more of those sources will be offering additional loan products to compete with life companies. Credit or capital type lenders will be offering interim, repositioning and bridge loans at floating or fixed rates. High yield mezzanine and equity sources will be active. Even more lenders will be willing to finance tenant in common or “TIC” entity transactions. Institutional, “joint venture” type financing will be available from a few sources on a very selective basis. However, as a result of the commercial banks increasing their commercial loan holdings from $1,033 billion to $1,184 billion during 2006 their activity is about to be restrained by bank regulators. The F.D.I.C. and Office of the Comptroller of the Currency have proposed imposing commercial loan holding “caps” with severe reserve requirements for banks that exceed their cap. Despite this banks should continue offering floating rate construction, bridge, repositioning and interim or “mini-perm” mortgages. Many will offer a form of “long term” mortgage but with rate adjustments, typically every 5 years. Most banks will also offer a fixed rate by entering in to a “swap rate” agreement, but for a premium. Financing will be available for “to be built” properties, including the exceptional “spec” building. Significant pre-leasing and/or strong borrower equity and guarantees will continue to be preferred if not mandatory to obtain such financing. Generally the lowest “spreads” over Treasuries, for typical 75% LTV, “non-recourse”, 10-year balloon term, 25-30 year amortization loans, will be offered by the insurance companies and Conduit/CMBS sources. The latter will readily offer 30-year amortizations for almost anything. Apartments and real “AAA” type credits will continue to be the preferred security enabling borrowers to secure the lowest rates and spreads with the “agencies” and CMBS lenders fighting for multi-family product by offering very low spreads. Our Region’s commercial real estate markets still appear to be somewhat in “equilibrium” with slow growth. Moderate demand in the apartment market can support selective new construction but as rentals compete with the now overbuilt “for sale” market, vacancy rates increase. We expect that to level and maintain an acceptable 5% factor overall. All office markets are reducing vacancy levels but most still appear oversupplied. Industrial vacancy ranges from 9% to 10% with exceptions. We anticipate that acquistions, substantially pre-leased to be built properties, repositionings and refinances will dominate the financing scene. As in 2006, the following types of financing should be available throughout 2007:
Subjectively, our correspondent life companies, GreatWest/Canada Life, Shenandoah Life and Thrivent Financial for Lutherans, are again looking to close increased volumes of permanent mortgages during 2007. Our CMBS sources and repositioning lenders are also targeting large volumes. Therefore, during the first half of 2007, if one is looking to acquire, build, expand or refinance, we believe that abundant mortgage funds at real long-term permanent rates in the range of 5.60% to 6.50% should be available for a typical request, depending upon the property particulars and timing. We hope this information will aid your financing plans for 2007. As always, if we can ever assist you, a friend or client, with advice, financing, consultation, or expert analysis or testimony, we would welcome a call. Best wishes for a happy and very prosperous 2007. Sincerely, Pro-Gressive Mortgage |
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RE: NEWSLETTER Dear Friend: As we enter another year, we wanted to provide you with our vision for the commercial mortgage financing markets during 2006. During 2005 commercial loan dollar volume and number of loans reached new records nationally, but not locally, despite a rising interest rate environment. The Fed raised short term rates eight times which drove the prime rate up 200 basis points to 7.25% 5.25%. The prime rate last reached 7.25% in May of 2001 during a period of decline from 9.50% as the Fed was addressing a recession. 30-day LIBOR also rose nearly 200 basis points by year end to 4.39% up from 2.40%. The longer benchmark 10-year US Treasury rate behaved very differently in 2005.. In January the rate opened at 4.21% then moved up through early March to the year’s high of 4.66% as prime went to 5.50%. The Treasury trended down through early June to the year’s low of 3.89% as prime increased to 6.00%. Thereafter it fluctuated within an upward trend but finished the year at about 4.37%. It appears as if long term investors were not as concerned as the Fed about short term capital demand or inflation. Treasury rates were also beneficially impacted by foreign investment. The yield curve is now inverted. Current consensus is that the Fed will raise rates again late in January 2006. The economy appears strong but there are conflicting reports about unemployment, manufacturing, year end earnings, retails sales and projections on how well the stock market will perform. Once in hand that data will impact what occurs at the Fed’s March meeting under its new chairman. It appears as if the Fed at some time during 2006 will pause or stop raising rates, especially if signs of a slowdown appear. For 2006, the Fed is targeting a continued GDP growth rate of about 3.5% but is concerned about the trade deficit and inflation. Energy prices are still about 16% higher than last year and the consumer and commodity prices continue to rise. It will be nice to know the Fed’s target inflation rate if formally publicized this year as suggested. No talk about the next recession has begun , yet all of the leading indicatos are starting to appear - interest rates are up, car sales are down, housing starts and sales are starting to decline and this downward trend has occurred in five of the country’s last seven recessions. One has to begin to wonder if the potential for a recession is on the horizon in time to impact the next presidential election. Despite this, it appears as if tremendous amounts of capital will again be available to serve the commercial mortgage market from all present sources including insurance companies, commercial banks, CMBS lenders, the “agencies”, credit companies and private sources. Insurance compaines, FNMA, Freddie Mac and CMBS sources will continue to price long term mortgages for “immediate” 60-90 day fundings at rate spreads in the general range of about 95 to 150 basis points over the corresponding Treasury. The rate spread will vary depending upon deal quality, ratio to appraised value, credit and other aspects. The standard 10 on 25 or 10 on 30 immediate funding permanent mortgage will be readily available for well-leased properties. Lender competition should be strong. Insurance companies will also be offering 15, 20 and 25 year self-liquidating mortgages. On a select basis they will offer “future take outs” for up to 12 months with the exception going beyond. Initially their spreads may be a little higher than CMBS and agency spreads but this could change depending upon deal competition and the yields of alternative investments available to them that have less impact on secondary market sale lenders. Their early rate lock option can be an advantage in a rising rate market. Commercial bank rates have been most affected by the Fed’s increases. Banks should continue offering construction, bridge, repositioning and interim or “mini-perm” mortgages. Many will offer a form of “long term” mortgage but with rate adjustments, typically every 5 years. Most floating rate lenders will offer a fixed rate by entering into a “swap rate” agreement, but for a premium. Credit companies will also be offering interim, repositioning and bridge loans at floating or fixed rates. High yield mezzanine and equity sources will also be active and more lenders will finance tenant in common or “TIC” entity transactions. Institutional, “joint venture” type financing will be available from a few sources on a very selective basis. Our region’s commercial real estate markets still appear to be somewhat in “equilibrium.” Moderate demand in the apartment market does support selective new construction, but as rentals competed with the hot “for sale” market vacancy rates increased. Look for that to reverse itself. Most, but not all, office markets are still oversupplied. Vacancy levels of 10% to 15% continue to discourage much new “spec” office construction. Industrial vacancy ranges from 5% to 10% depending upon building size. Financing will be available for to-be-built properties, including the exceptional “spec” building. Significant pre-leasing and/or strong borrower equity and guarantees will be preferred if not mandatory to obtain such loans. Generally the lowest “spreads” over Treasuries, for typical 75% LTV, “non-recourse”, 10-year balloon term, 25-year amortization loans, will be offered by the life companies and Conduit/CMBS sources. The latter will readily offer 30-year amortizations as a competitive “offset.” Apartments and real “AAA” credits will continue to be preferred, enabling them to secure the lowest rates and spreads. We expect that substantially pre-leased to-be-built properties and refinancings will again dominate the financing scene and that the following types of financing will be available in 2006:
All considered, early evidence seems to indicate that the first half of 2006 will feature “more of the same”, noting that increased rates and recent volumes may slow activity. Subjectively, Thrivent Financial for Lutherans and GreatWest/Canada Life, our correspondent life companies, are looking to close $1 billion and $400 million of permanent mortgages during 2006 respectively. Therefore, during the first half of 2006, if one is looking to acquire, build, expand or refinance, we believe that abundant mortgage funds at real long-term permanent rates in the general range of about 5.50% to 6.50% should be available for a typical request, depending upon the property particulars and timing. We hope the foregoing will aid your financing plans for 2006. As always, if we can ever assist you, a friend or client, with advice, financing, consultation, or expert analysis or testimony, we would welcome a call. Best wishes for a Happy and very Prosperous New Year. Sincerely, Pro-Gressive Mortgage |
RE: NEWSLETTER Dear
Friend, 2004
witnessed a strong residential sales and mortgage market nationwide.
Commercial mortgage lenders had a good year but much of it was
generated by refinancing existing loans. Interest rates reached
historic “lows”. The
federal government continued to experience an increasing deficit
caused by a number of factors including the tax reduction stimulus,
the costs of funding its general budget, the Middle East troop
deployment and homeland security and the Congress’ unwillingness
during a major election year to blunt the deficit by reducing and
controlling spending in other areas. Oil
and gas prices skyrocketed then backed off modestly.
As they permeate virtually every aspect of American life their
full impact on increasing inflation cannot be discounted or explained
away and OPEC is currently contemplating reducing world production.
Steel prices and other building material prices rose
dramatically as world wide demand for those products impacted costs in
this country. Year end
retail sales while “good” were not as strong as anticipated.
The stock market had a good fourth quarter. As summarized below, the 10-year benchmark
treasury rate was again very reactionary to market and international
news, “Fed” policy actions and statements and to pre and post
presidential election conditions:
Concerns
about historically low treasury rates impacting foreign investment in
American securities, an improving job market and inflation caused the
Federal Reserve to increase short term interest rates five times by an
aggregate of 1.25% while indicating that further increases are likely.
Correspondingly, the Prime Rate increased from 4.00% to 5.25%
(higher than treasuries) evidencing an overlooked 31% INCREASE.
The economy is expanding.
Inflation is a concern. In
the past the “Fed” has permitted rapid inflation by delaying
acting vigorously or has overreacted leading to economic downturn and
recession. Their actions
during 2005 will critically impact how our economy will perform
throughout the balance of the Bush Administration’s term. As no one sector can be
pinpointed as being a major engine to bring about strong economic
growth the financial markets appear to be looking for direction.
Currently they appear to only be receiving it from the
“Fed” with its acknowledged “bias” toward more rate increases
during 2005. For the past 5 years long term
commercial mortgage lenders have varied their mortgage rate spreads
over treasuries to reflect competition from contemporaries as well as
from alternative investments. 2004
was no different with spreads generally being lowered from early
January levels through the end of the summer. Generally
the lowest “spreads” over treasuries, for typical 75% LTV,
“non-recourse”, 10-year balloon term, 25-year amortization loans,
are offered by the insurance companies.
Conduit/CMBS sources generally quote slightly higher spreads
but readily offer 30-year amortizations as a competitive “offset.”
Apartments and real “AAA” credits continue to be preferred
enabling such loans to secure the lowest rates and spreads as
currently estimated below
As
we enter the New Year the commercial mortgage industry offers many
beneficial aspects but there are also some concerns confronting
borrowers and lenders that plan on being active in the commercial
mortgage market. Insurance
companies, banks, conduit/CMBS lenders, credit companies, mezzanine
lenders and others will all be in the market.
In a climate of rising interest rates the insurance companies and
banks will enjoy a competitive advantage over conduit/CMBS lenders due
to their ability to commit and offer to lock rate “prior to” receipt
of third party reports. Unlike
conduit/CMBS lenders these sources are also able to accommodate a
borrower’s future needs. However,
conduit/CMBS underwriting will be more aggressive.
Other negative CMBS considerations include their large reserve
requirements; their prohibitive defeasance prepayment method and their
inability to provide future funds. New
free standing retail, substantially pre-leased to be built properties
and refinances will continue to dominate the local financing scene.
The following types of financing will be available in 2005: •
Typical, standard, immediate funding mortgages. •
“Future” permanent take-outs, typically for only 12 months
with exception to 18. •
Construction loans with convertible 3 to 5-year “mini-perms”. •
Combination construction/permanent loan variations with an
interest rate that is fixed for the life of the loan that is locked at
or prior to construction closing. •
Institutional “joint venture” type financing for
high-quality, value created/added transactions. •
Mezzanine equity financing without a lien on the real estate. •
Selective “tax frees” and customized financings. The
commercial real estate markets in our region should improve but remain
somewhat in “equilibrium.” Moderate
demand in the apartment market will support selective new construction
as evidenced by the strong Center City Philadelphia market.
Most, but not all, office markets will improve but remain
oversupplied as local vacancy levels of close to 15% will continue to
discourage new office construction.
The same appears to apply to major retail and industrial property
markets. Individual investor purchases in the $3,000,000 - $20,000,000
price range will continue to be limited by the large cash down
requirements and seller tax consequences. Regionally,
commercial loan demand should remain “soft” at least through the
first half, particularly if rates increase as anticipated.
Lender competition for good loans will exist but lenders will
exhibit caution, in the office, hotel and industrial loan sectors, due
to present vacancy levels. Financing
for “to-be-built” properties, including the exceptional “spec”
will be available. Significant
pre-leasing and/or strong borrower equity and guarantees will be
preferred or mandatory prerequisites to secure such financing. Depending
upon loan demand, as well as short-term Libor and long-term treasury
rate movement, “rate spreads” should remain at current levels but
could widen. In the past
when treasury rates increased dramatically so did rate “spreads”.
Supply and demand will impact this.
It is important for borrowers to recognize that the real interest
rate offered, not the spread or other “rate formula,” and when, not
how, the rate can be “locked” is most important.
This is very significant when interest rate increases appear
imminent. An apparent 10-15
basis point rate spread “advantage” can quickly evaporate if
treasury rates increase while one is waiting for receipt of the 3rd
party reports before they can lock rate. Consistent
with the above, Thrivent Financial, and Canada Life/Great West Life our
correspondent life companies are looking to commit between $750 million
and $1 billion and $250 million to $300 million respectively of
permanent mortgages during 2005. During
the first half of 2005, if you or a client are looking to acquire,
build, expand or refinance, we believe that abundant mortgage funds at
real long-term permanent rates in the 5.25% to 6.35% range should be
available depending upon the loan request particulars and timing. As
always, we hope the foregoing will aid your plans for 2005.
If at anytime you feel that we can assist you, a friend or
client, with financing, consultation, expert analysis or testimony, we
would welcome a call or visit us at www.pro-gressivemortgage.com.
Best wishes for a Happy and Prosperous New Year. Sincerely, Pro-Gressive
Mortgage
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NEWSLETTER
RE: Commercial Mortgage Financing Dear
Friend, As we into any new year, providing meaningful forecasts for clients and friends is always a challenge. Economic news and statistics available are constantly changing and often contradictory. During 2003, the economic news was mixed; new home sales reached an all time high; year end retail sales were far lower than hoped; residential mortgage activity was very strong trailing off at year end, commercial mortgage lenders generally experienced flat loan volumes; the Federal Reserve lowered rates to post WWII levels; unemployment claims declined and the stock market rebounded and rose steadily. Inflation continues to be reported as a "non-issue" despite rising food, insurance, automobile, housing and building costs. The federal government continues to use deficit spending to address its general budget needs as well as the costs of homeland security and mid-east troop deployment. As we indicated last year, it's hard to envision what segment of the economy will lead to strong economic growth. It appears as if slow and steady improvement in a variety of sectors is responsible for current economic growth that should continue. Manufacturing is predicted to improve during the first quarter, however, if the government again starts competing with private industry for capital, we could see a raise in interest rates which could blunt economic expansion. Despite this, at their December meeting, the "Fed" indicated that inflation and interest rates should remain low for at least a little while longer. Their "balancing act" to date is nothing short of remarkable, but "everyone" expects an improving economy and rates to rise at some point during 2004. Throughout 2003, the benchmark 10-year treasury was again very reactionary to the “news du jour.” While the rate vacillated between 3.55% and 4.10% in the first quarter of the year, it declined in the second quarter to its 3.11% low in mid June. It then rose steadily to 4.60% in September, briefly dropped to 4.00% in late September and finished late December in the range of 4.10% - 4.20%. The Prime Rate fell from 4.25% to 4.00%. Comparatively, the 30-day Libor Rate declined from 1.34% in January to 1.12% in December. The use of Prime or Libor as a pricing barometer really appears to be philosophical. For the last 4 years now, we have seen commercial mortgage lenders periodically vary their rate quotes and "spreads" as well as when an applicant could "lock rate". Minimum, or "floor", rates were occasionally imposed inconsistently as rates fell and competition for good loans remained strong. As predicted in last year's newsletter, limited demand suppressed potential rate increases and "rate spreads" were lowered. Except with Libor pricing, such "floors" have evaporated. The commercial real estate markets in our region still appear to be somewhat in "equilibrium". Moderate demand in the apartment market can support selective new construction but rentals compete with the "owned" market. Most, but not all, office markets are still oversupplied. Vacancy levels of 10% to 15% continue to discourage much new office construction. The same appears to apply to our major retail and industrial property markets. Individual investor purchases in the $2,000,000-$20,000,000 price range continue to be limited by the large cash down requirements and the seller tax consequences. So, as of this date, what do we envision and what can we tell you about commercial real estate financing as we head into the New Year? We believe that overall commercial loan demand will again remain "soft" at least through the first six months, especially if rates increase. Competition for good loans should exist. Despite this, lenders will continue to exhibit caution, particularly in the office, retail, hotel and industrial sectors, due to the present vacancy levels. Financing for "to-be-built" properties, including the exceptional "spec" will be available. However, significant pre-leasing and/or strong borrower equity and guarantees will be preferred if not mandatory prerequisites to secure such financing. Depending upon loan demand, as well as short-term Libor and long-term treasury rate movement, "rate spreads" should remain at current levels. The real interest rate offered not the spread or the other "rate formula", and when, now how, the rate can be "locked" will be most important to borrowers. This can be very significant if the interest rates begin to rise. Life companies, banks, conduit/CMBS lenders, credit companies, mezzanine lenders and others will all be in the market. Life companies and banks will continue to enjoy a competitive advantage over conduit/CMBS lenders by continuing to commit and offer to lock rate "prior to" receipt of third party reports and they are consistently available to accommodate a borrower's future needs. However, conduit/CMBS underwriting will be more aggressive. Unfortunately, conduit/CMBS lenders are still impacted by the instability in the capital markets and their general inability to lock rate until the environmental, engineering and appraisal reports are in-hand leaving Borrowers exposed to interest rate risk in a potentially rate inclining market. They also typically require large reserves; the prohibitive defeasance prepayment method and are unable to provide future funds. Generally, the lowest "spreads" over treasuries, for typical 75% LTV, "non-recourse", 10-year balloon term, 25-year amortization loans, will be offered by the life companies. Conduit/CMBS sources will continue quoting higher spreads but will readily offer 30-year amortizations as a competitive "offset". Apartments and real "AAA" credits will continue to be preferred enabling them to secure the lowest rates and spreads as currently estimated below:
Type of Security
Rate Spread Over Treasuries While we expect that new free standing retail, substantially pre-leased to be built properties and refinances will again dominate the financing scene, we also predict that the following types of financing will be available in 2004: *
"Future" permanent take-outs but typically for only 12 months. Subjectively, Thrivent Financial, our correspondent life company, is looking to close between $750 million and $1 billion of permanent mortgages during 2004. Therefore, during the first half of 2004, if you or a client are looking to acquire, build, expand or refinance, we believe that abundant mortgage funds at real long-term permanent rates in the 5.50% to 6.50% range should be available for a typical request, depending upon the property particulars and timing. We hope the foregoing will aid your financing plans for 2004. As always, if we can ever assist you, a friend or client, with an analysis, financing, consultation, expert analysis or testimony, we would welcome a call. Best wishes for a Happy and very prosperous New Year. Sincerely, Pro-Gressive Mortgage
|
NEWSLETTER
RE: Commercial Mortgage Financing Dear
Friend, As
we enter 2003, providing accurate forecasts for clients and friends
appears more challenging than at any time in the last 5 years. The factual
and statistical information available is in constant conflict.
As I write, even America’s renowned economists are meeting in
Princeton in an attempt to reach a meaningful consensus. During
2002, the economic news was mixed; new home sales reached an all time
high; year end retail sales were far lower than hoped; the stock market
dropped as much as in any year after the great depression; public
companies moved away from providing quarterly income forecasts;
residential mortgage activity was very strong, commercial mortgage lenders
generally experienced reduced loan volumes; the Federal Reserve lowered
rates to post WWII levels; unemployment claims declined then rose during
the last quarter; two major airlines filed bankruptcy, early year
recession ending predictions proved inaccurate and a treasury secretary
and economic advisor were replaced. Late
year forecasts began appearing about the recession being over but is it
really? Inflation was not
discussed despite rising gasoline, insurance, automobile and housing
costs. As
we look ahead, we note that there isn’t much more room for the “fed”
to help the economy by further lowering rates.
Government tax revenues appear to be “down” at every level. The
federal government is using deficit spending to address its general budget
needs as well as the costs of homeland security and mid-east troop
deployment. A possible tax
cut, as proposed in the President’s “stimulus package”, and any
costs of a possible war with Iraq will add to the deficit.
While factory orders were up in December, it’s hard to envision
what segment of the economy will lead us out of the recession. It appears
as if slow and steady improvement in a variety of sectors is required to
provide economic growth. However, if the government again starts competing
with private industry for capital that could raise interest rates and
stifle economic expansion. Expansion could also be blunted by a war and other
geopolitical concerns. Throughout
2002, the benchmark 10-year treasury was very reactionary to the “news
du jour.” While the rate
vacillated between 4.84% and 5.42% in the early part of the year, it
declined steadily from 5.27% in May throughout the remainder of the year,
except for small “up ticks” during mid October and late November.
In December, the rate dropped 27% from 4.22% to finish the year at
3.77%, a 138 basis point decrease. As
of this writing, however, it was up again to 4.07%. The now almost meaningless Prime rate ended at 4.25%. Similar
to 2001, during 2002 commercial mortgage lenders continually varied their
rate quotes and “spreads” as well as when an applicant could “lock
rate”. Minimum, or
“floor”, rates were occasionally imposed but inconsistently as rates
fell and competition for good loans remained strong.
As predicted in last year’s newsletter, limited demand suppressed
the rate increases and “rate spreads” were lowered by year end.
During the last 3 months of 2002 rate spreads for typical 75% LTV
commercial mortgages were reduced from their previous 2.00%-2.25% range to
the 1.75%-2.00% range with apartments, low LTV situations and real credit
loans able to secure lower spreads. So,
as of this date, what do we envision and what can we tell you about
commercial real estate financing as we start the New Year? The
commercial real estate markets in our region seem to be somewhat in
“equilibrium.” Moderate
demand in the apartment market supports selective new construction. Most, but not all, office markets are still oversupplied.
Present vacancy levels of 10% to 15% discourage much construction
in many areas. The same
appears to apply to our major retail and industrial property markets.
Sales activity in the $2,000,000-$20,000,000 price range appears
limited by the large cash down requirements and seller tax consequences. Accordingly,
we believe that overall commercial loan demand will again remain
“soft” at least through the first six months.
Competition for good loans should exist. Despite this, lenders will continue to exhibit caution,
particularly in the office, retail and industrial sectors, due to the
present vacancy levels. Life
companies, banks, conduits, credit companies and others will all be in the
market. Life companies and
banks have a competitive advantage over conduits by continuing to commit
and offer to lock rate “prior to” receipt of third party reports and
are consistently available to accommodate a borrower’s future needs.
However, conduit underwriting will be more aggressive.
Unfortunately they are negatively impacted by instability in the
capital markets and their general inability to lock rate until the
environmental, engineering and appraisal reports are in-hand leaving
Borrowers exposed to interest rate risk.
They also require large reserves; the extremely prohibitive
defeasance prepayment method and are unable to provide future funds. Depending
upon loan demand and treasury rate movement, “rate spreads” should
remain at current levels or, perhaps compress moderately. The real interest rate offered not the spread or other
“rate formula,” and when, not how, the rate can be “locked”
continue to be most important to borrowers.
This can be very significant if treasury rates begin to increase
and they may if stock dividends become “tax free.” Generally
the lowest “spreads” over treasuries, for typical 75% LTV,
non-recourse, 10-year balloon term, 25-year amortization loans, will be
offered by the life companies. Conduits
will continue quoting higher spreads but will readily offer 30-year
amortizations as a competitive “offset.”
Apartments and real “AAA” credits will continue to be preferred
enabling them to secure the lowest rates and spreads. While
we expect that free standing retail (Walgreens, CVS, Food Chains, Borders,
etc.) substantially pre-leased to be built properties and refinances of
existing properties will dominate the financing scene, we predict that the
following types of financing will also be available in 2003: -
Financing for “to-be-built” properties, including the
exceptional “spec”, however, significant pre-leasing and/or strong
borrower equity and guarantees will be preferred if not mandatory
prerequisites for most such proposals. -
“Future” permanent take-outs but typically for only 12 months.
-
Construction loans with convertible 3 to 5-year “mini-perms”
(readily available.) -
A combination construction/permanent loan variation with a fixed
interest rate for the life of the loan that is locked at construction
closing. -
Institutional “joint venture” type financing for larger,
high-quality transactions. -
Selective “tax frees” and customized financings. Subjectively,
Thrivent Financial, our correspondent life company, is looking to close
$700 million or more of permanent mortgages during 2003.
Therefore, during the first half of 2003, if you or a client are
looking to acquire, build, expand or refinance, we believe that abundant
mortgage funds at real long-term permanent rates in the 5.50% to 6.50%
range should be available for a typical request, depending upon the
property particulars. We
hope the foregoing will aid your financing plans for 2003.
As always, if we can ever assist you, a friend or client, with an
analysis, financing, consultation or expert testimony, we would welcome a
call. Best wishes for a Happy
and very Prosperous New Year. Sincerely, Bruce
J. Coin
|
NEWSLETTER
RE: Commercial Mortgage Financing Dear
Friend,
As
we head into 2002, as has become our custom, we wanted to write to share
our observations and forecasts for the commercial mortgage market.
2001 was an interesting year to say the least. Upon
reflection, the Federal Reserve’s 2000 year rate increases appear to
have been too large and too frequent and failed to afford enough time
for the economy to adjust. As
a result, the desired and frequently mentioned “soft landing” was
missed. While further weakening the economy, the effect of the
September 11th tragedy also served to dramatize the fact that
we were in a recession. You
may recall, that prior to September 11th, great care was
being taken by the “Fed” to avoid using the “R” (recession)
word. In
an early attempt to reverse the damage and to try to minimize the
impending recession, on January 3, 2001, the Federal Reserve began
lowering rates. They did so
eleven times during 2001; however, the reductions did not prevent the
recession. Those rate
reductions had the most impact on short-term rates, eradicating the
“inverted yield curve” that persisted prior to April.
The same impact has not been seen in long-term rates. Last
January, the 12-month treasury rate was fluctuating in the range of
4.60% - 4.90%; the benchmark 10-year treasury was in the 4.95% to 5.30%
range and banks were quoting an irrelevant 9% Prime rate.
During the year, the 12-month treasury declined steadily to about
1.66% and Prime dropped to 5%. Dissimilarly,
the 10-year treasury moved up and down.
From January through late August, it hovered in the 4.75% - 5.45%
range; it dropped to the year’s low of 4.18% on November 7th
and immediately escalated to 5% by Thanksgiving.
As of this writing, it is 5.17%.
The fearful investors “flight to quality” appears to have
diminished stimulating the recent upturn in treasury rates. Our
January 2001 newsletter pointed to the very strong potential for Accordingly,
throughout the year, commercial mortgage lenders were continually
varying their rate quotes and “spreads,” as well as when an
applicant could “lock rate.” This
constant adjustment combined with economic concerns, the September 11th
impact and borrower hesitation resulted in reduced loan volumes. So,
what do we initially foresee for 2002?
Government
tax revenues are down at every level.
There isn’t much more We
believe that loan demand will remain “soft” at least through the
first six months. As a
result, any significant rise in interest rates will further suppress
loan demand which should temper the increases.
Despite this, lenders will exhibit a little more caution,
particularly when underwriting in the office, retail and industrial
sectors, due to present increased vacancy concerns. Life
companies, banks, conduits, credit companies and other sources will all
be offering financing. The
conduits will continue to offer more aggressive underwriting, but will
be limited by capital market instability and general inability to lock
rate until the third party reports (environmental, engineer, appraisal)
are in-hand, leaving Borrowers at risk.
They will also continue to require large monthly reserves, the
extremely prohibitive defeasance prepayment method and the inability to
provide future funds if desirable or necessary.
Unlike conduits, insurance companies and banks will continue to
commit and offer to lock rate “prior to” receipt of the third party
reports and they are always “there” to accommodate a borrower’s
future needs. Competition
for the very good loans should exist.
Depending upon the movement in treasuries, this should allow
“spreads” to remain at current levels or, perhaps even be reduced
moderately. The real
interest rate offered, however, not the spread or other “rate
formula,” and when, not how, the rate can be “locked” should
remain most important to borrowers. Life
companies will continue quoting spreads in the range of 2.00% to 2.40%
over treasuries for a typical 10-year balloon term with 20 to 25-year
amortization schedules. Except
for apartments, floor rates of about 7% should still be in evidence.
Conduits will continue quoting higher spreads but will readily
offer 30-year amortizations as a competitive “offset.” In all arenas, apartments and real “AAA” credits will be
able to secure the lowest rates and spreads. Financing
will also be available for “to-be-built” properties, on a selective
basis but only with significant pre-leasing or strong borrower equity
and guarantees. “Future”
permanent take-outs will be available but typically only for 12 months.
Construction loans with 3 to 5-year “mini-perms” will be
readily available. A
variation is a combination construction/permanent loan whereby a fixed
interest rate for the life of the loan is locked at the construction
loan closing. Institutional
“joint venture” type financing will also be available but only for
larger, high-quality transactions. Subjectively,
our correspondent life company, TFL, through a recent merger with
Lutheran Brotherhood has become a new company with approximately $55
billion in total assets. During
2002, they are looking to close between $500,000,000 and $600,000,000 of
new permanent mortgages and possibly more. Therefore,
during the first half of 2002, if you or a client are looking to
acquire, build, expand or refinance, we believe that abundant mortgage
funds at real long-term permanent rates in the 6¾% to 7¾% range will
be available. We
hope the above will aid your New Year’s financing plans.
Of course, if we can assist you, a friend or client, with
anything we would welcome a call. Best
wishes for a Happy New Year. Sincerely, Pro-Gressive
Mortgage Corp. |
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Newsletter RE: Commercial Mortgage Financing Dear
Friend, The
transpiration of the first five plus months of 2001 allows us to reflect
upon the economy’s reaction to a new President, 5 very dramatic
interest rate reductions by the Federal Reserve, rising energy prices,
rising unemployment and the almost daily array of conflicting economic
data. The
euphoria caused by the rapid growth of the internet and related computer
sales, dot.com companies and similar taken as a “collective
industry”, obviously had a more profound impact on the economy’s
growth from 1991 to 2000 than was previously understood.
The effect of its downturn has been just as dramatic and is still
rippling through every aspect of the economy including the real estate
industry. During
January the benchmark 10-year Treasury ranged from 4.93% to 5.30%.
It dipped to a low of 4.74% in mid-March but is now hovering
between 5.30% and 5.50%, higher than last January.
Throughout the last six months, the “spreads” over the
treasury quoted by lenders remained in the range of 200 to 240 BPs, down
modesty from early January levels with apartments receiving lower
spreads in the range of 150 to 200 BP. As
predicted in our early January newsletter, due to this Treasury rate
vacillation, for typical 75% LTV situations, many lenders have imposed
“floor rates” for non-apartment loans of 7.25%, with the exception
going to 7.00%.
Those “floor rates” still exist although with the recent
upturn in treasuries they are not as meaningful. So,
What do we envision for the balance of the year? Life
companies, banks, conduits, credit companies and other sources will all
continue to offer financing.
While not for everyone, the conduits will offer more aggressive
underwriting but are limited by an inability to lock rate until the
third party reports (environmental, engineer, appraisal) are in-hand,
leaving Borrowers at risk.
Adversely, they also typically require large monthly reserves,
the extremely prohibitive defeasance prepayment method and the inability
to provide future funds if desirable or necessary.
Unlike conduits, insurance companies will continue to commit and
lock rate “prior to” receipt of the third party reports.
Loan
demand will remain “soft”.
Despite this lenders will exhibit more caution due to fears of
increased vacancies, particularly in the office, retail and industrial
sectors.
Real rates and “spreads” for those might increase moderately
with bonafide, long-term credit deals being the exception. Accordingly,
increased Lender competition for good loans will exist.
Depending upon the movement in treasuries, this should allow
“spreads” to remain at current levels or to be reduced moderately.
The real interest rate offered, however, not the spread or other
“formula”, is what matters most.
When, not how, the rate can be “locked” is most important. Due to continued economic uncertainty, many life companies will be quoting spreads in the range of 2.00% to 2.30% over the 10-year treasury for a typical 10-year balloon term with a 20 to 30 year amortization schedule. The “Norm” is 2.15% with a twenty-five year schedule except for new buildings, quality apartments or S&P rated credit situations which can secure lower rates/spreads. Conduits will continue quoting higher spreads but will readily offer 30-year amortization as a competitive “offset”. In all arenas, apartments will be able to secure the lowest rates and spreads. Financing
will be available for “to be built” properties, but on a more
selective basis and only with significant pre-leasing or with strong
borrower equity and guarantees.
Fixed rate “future” permanent take-outs will be available but
typically only for 12 months.
Alternatively, if a proposed security is initially short of
qualifying for a future take out, a construction loan with 5-year
“mini-perm” will be available.
A variation of this format is a combination
construction/permanent loan whereby a fixed interest rate for the life
of the loan is locked at the construction loan closing.
Institutional “Joint venture” financing will also be
available but only for larger, high-quality transactions.
“To be built” apartment projects obviously do not require
pre-leasing but should be limited to (or staged in sections of) about
100 units.
A strong rebound by the stock market could exert pressure on the
mortgage market to secure higher rates.
At this time that appears to be wishful thinking and probably
will not occur this year.
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Newsletter RE: Commercial Mortgage Financing Dear
Friend, As we head into the New Year, as is now our custom, we wanted to write to our clients and friends to share our observations and forecasts for the commercial mortgage market. Economically speaking, the next six months will definitely be an interesting period. As we expected, during 2000, the Fed exerted pressure on the economy through continued interest rate hikes to purge the Stock Market’s irrational exuberance particularly in the hi-tech/NASDAQ Markets. Last summer data began confirming that the economy was slowing. The potential for a recession is now obvious to everyone, including President Elect Bush. Surprisingly, despite high-energy costs, inflation concerns appear to remain a "non-issue." Confidence in the economy, however, has begun to deteriorate as evidenced by the weak holiday season retail sales. Unemployment is also about to rise. On January 3rd and 4th the Fed, in response to the economic data, significantly lowered the Fed funds rate by ½% and the discount rate by ¼% hoping to reverse the decline in confidence while trying to minimize recession fears. The actions sent a clear message that the Fed is committed to maintaining relatively stable and liquid capital markets as well as economic growth. Just as it took over a year of rate increases (6/99 – 5/00) to cool the economy, it will take more tha |
