LOCAL INTEREST & CAPITALIZATION RATES
Current Market Rates
These are the current interest rates as of July 8, 2020. Keeping in mind that all commercial loan quotes depend on many underwriting factors including the actual property type, the strength of the borrower, the properties location, its loan-to-value (LTV), debt service, or debt coverage ratio (DCR), property usage (investment or owner-occupied), property type, and the borrower’s financial strength. All of these factor into Risk and Liquidity resulting in a loan rate. There however can be other factors leaning in on the property that the borrower would have no control of such as COVID-19, the elections, weather phenomena, etc.
Based on the rates below, there has been a change in the borrowers favor.
There has been a clear decline in interest rates which was not completely unexpected. The question is are banks lensing on new commercial paper. Most banks have reported that they have began implementing stricter lending standards. It is safe to say standards across all loan types have been tightened and continue to operate in flux.
Source: George Smith Partners, May 20, 2020
JSO's Perspective - May 27, 2020
Can unemployment get worse. According to Bloomberg.com, economists say the United States is entering a sharp recession, with some projecting gross domestic product is headed for its worst drop in quarterly records going back to 1947 (March 31, 2020 - Economists See U.S. Facing Worst-Ever Quarterly Contraction). As of May 16, 2020, 38.6-million people have lost their jobs in the last nine-weeks ending May 16, 2020. 6.87-million filed for unemployment in the week ending March 28, 2020 and a further 6.615 the following week ending April 4, 2020. It has been a steady decline since than with the latest figures being 2.438-million for the week ending May 16, 2020. Given the relentless increase in unemployment there is a growing concern amongst economists that many jobs have been lost for good. According to New York Times, Nicholas Bloom, an economist at Stanford University stated that the path to recovery is going to take longer than anticipated and looks a lot grimmer then first thought. (NYT 5/22/2020) In the same article, Mr. Bloom estimated that 42% of layoffs may result in permanent job loss. Regardless it was pointed out that the economy that does come back will most likely be quite different then the economy of January 2020.
The two images above our From Politico and the New York Times and graphically portrayed depth of the unemployment prices still unfolding.
It is difficult to get a handle on the “real” unemployment rate. The U-6 is by all accounts the broadest measure of unemployment. It includes those who have given-up looking for work and those who are or were working part-time but would prefer to work full-time. Many people consider U-6 the real or most reliable unemployment rate. The Bureau of Labor Statistics yields to U-3 which is the seasonally adjusted and the commonly quoted unemployment rate found in the media. The latest available for U-3 is 17.2% as of May 9, 2020. This is where statistics really clouds the picture. Bloomberg.com reported April 14, 2020 that the projected April 16, 2020 unemployment rate will be 17%. JP Morgan have estimated that the current rate is 20%. But what’s most astounding is the pace of the job losses. In looking at the graph above, there has never been such an event. In March, the President of the Federal Reserve Bank of St. Louis, James Bullard, stated that U.S. economy should recover strongly in the second half of 2020 if the government and businesses respond forcefully to the coronavirus, with massive testing to prevent fresh outbreaks. Bullard repeatedly stressed (and this has been reinfoced by almost every business leader) that mass testing of Americans is necessary to ensure confidence for workers to return and businesses to invest. But even by 2022, unemployment is expected to average 5%.
There were two items here, one being testing and the other being the reliance on science. There has been a lack of strong central leadership and indeed the country is more divided than ever.
Source: George Smith Partners.
JSO's Perspective - May 1, 2020
The end of April has seen a whirl wind of activity the likes that have not been seen in a decade.
The six week total for unemployment filings topped 30-million with a further 3.84-million claims ending April 25th 2020. If there is some good news in all of this, its the fourth week that the rate has being decelerated suggesting to most that the worst of the lay-offs has occurred, but it fat from over. The table below from Bloomberg (April 29, 2020) is in a word frightening. We are looking at years for any meaningful recovery. The unemployment rate which had stood as 20% rose to 22% or the highest since the Great Depression of the 1930.
The month still had a few more number to throw at us. Gross Domestic Product. Quarter One showed that the broadest measure of the US goods and service output was down a staggering -4.8%. This was the worst quarterly contraction since 2008 when the country was in a deep recession. The table below from the New York Times (April 29, 2020) accounts for months January, February and March. One has to assume that the very worst is yet to come. Accounting for April and May before any significant breaks are applied to job losses, it looks like the 2008-09 recession was only a warm-up. Contraction in the GDP may top -30% and this will make this depression equivalent to the 1930s.
The Fed Chair Jerome Powell said in his press conference this week that “We are going to see economic data for the 2nd quarter that is worse than any data we have ever seen.” He expressed a hope for a Q3 bounce back and I feel that this is partially correct. The elephant in the room is the trajectory of COVID-19 itself. It is just way to early to anticipate after the major States start to re-open what consumers overall reaction will be? What we don't need is more of President Trump's talk about removing one of there few adults in the room as he was alluding to as late as mid March of this year. Destabilizing the markets even further is not good policy. The Feds are holding interest rates close to zero and are continuing on their buying spree of Treasures and mortgage bonds.
Finally (have to stop somewhere,) rent is due today. April turned out somewhat better than expected but much has changed in the last four-weeks. Multifamily housing is surely what is on everyones mind, but with offices closed, some industry idled and retail in an utter mess, it will have REITs right down to the small investor on pins-and-needles waiting for the checks.
April 15, 2020
April 1, 2020
Once again I have to reference George Smith Partners email@example.com for their excellent analysis this week. I would strongly recommend following their link and receive their data.
March 25, 2020
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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.
Under no circumstances do I want to be Debbie Downer, but from The Tax Foundation (https://taxfoundation.org/unemployment-insurance-claims/) these were two stunning graphs.
The jump in the March 28, 2020 claims may be partially due to people who had try to file claims and the prior week but were unable to for various reasons mainly due to a overload. The mass layoffs and furloughs is most likely the only evidence one needs to understand that the US economy is in for a fairly deep recession. There was some good news today in that there was a significant increase in oil prices as Russia and South Arabia are weighing a truce of sorts in their ongoing talking to the bottom. There’s no doubt that there is a shortage of storage capacity at this stage. These low oil prices have guarded the economy is in many parts of Pennsylvania.