LOCAL INTEREST & CAPITALIZATION RATES
Current Market Rates
March 25, 2020
From George Smith Partners - 10250 Constellation Blvd., Ste. 2700, Los Angeles, CA 90067
Office (310) 557-8336
March 26, 2020
Indexes: This morning the yields on the 1-month T and the 3-month T went negative. (1M = -0.03% and 3M = -0.01%). This means that someone purchasing that note will receive no interest and slightly less than the principal amount of the bond when it is redeemed at the end of the term. In other words, paying the U.S. Treasury to hold the money. This is unprecedented here although negative yields are common in Japan, Germany and other countries. The 10-year T is now 0.83%. The Treasury market is functioning more normally after an initial crash and fear factor last week that saw investors selling treasuries to hoard cash. LIBOR: 30-day LIBOR is the most common index for floating rate loans and usually tracks the Fed Funds rate closely. According to that logic, 30-day LIBOR should be 0-0.25% today, but instead it is 0.92% due to stresses in the overnight funding market. Note that its likely replacement, SOFR, is at 0.04% (matching the lower end of the Fed Funds rate). This period of dislocation will spur further debate on the wisdom of replacing LIBOR (London InterBank Offered Rate) with SOFR (Secured Overnight Financing Rate.).
March 18, 2020
February 26, 2020
George Smith Partners is a premier nationwide conduit between users of capital and providers of capital in commercial real estate financing.
I cannot recommend this data page enough. Since February 26, 2020 and March 18th, 2020 the changes are so significant. The question from a valuation point of view is banking outcomes...
What Are the Current Commercial Loan Interest Rates?
Commercial loan rates can average between 1.959% and 12.000%+, depending on the loan product. Keep in mind that all commercial loan quotes depend on several underwriting factors including the property and borrower location, loan-to-value (LTV), debt service coverage ratio (DSCR), property usage (investment or owner-occupied), property type, and the borrower’s financial strength. The interest rates below should be considered indicative for properties in primary markets with good LTVs and DSCRs, as well as a strong and experienced sponsor.
Updated March 26, 2020
Finally, where are the Capitalization Rates today? With interest rates falling and a pitter of request for refinancing one would assume that Cap Rates are falling. Mathematically the Basic Cap Rate will decline (with all other thinks being equal.) The Overall Cap Rate may not fare so well. This is where the rate is tweet for items such as appreciation/depreciation, risk, liquidity, etc. To be frankly honest at this stage I do not believe there is enough data anywhere.
That data we have anyway is all empirical, that is to say it is what groups of professionals agree on as to what is the correct rate should be. There is NO source. Who knew mathematics could take such a backseat. In looking at properties that the tenants are going to have an issue paying rent there maybe liquidity and risk issue. In looking at properties that have excessive real estate taxes per square-foot there are too many issues to name that would have a negative affect the capitalization rate.
REITs however have put-the-cat amongst-the-pigeons, and one can only hope that’s some of their cap rates on which purchases were finalized hold steady. While we rarely do this this type of appraisal work anymore, there was a significant uptick in rates for REITs in the last recession (2008-09). I simply can’t believe the same is not going to be true in about three months.
As for the more standard CMBS loans, there is absolutely no reason to believe that banks will not behave in the exact same way as they did in 2008. ie. Badly.
We are just going to have to wait a few more months to have a look at what type of damage (if any) has been caused to the commercial real estate market. There is always a silver lining, which is lending practices for the most part how been strong, steady and realistic. This will most definitely have a more calming effect in the chaos of 2008-09.