Long term interest rates are still sitting near all time lows since the huge declining trend in rates starting at the beginning of the year. The yield curve currently has somewhat of a shallow “U” shape to it, with 2 year treasury rates sitting at 1.54%, 5 years at 1.43%, and 10 years at 1.56%. Due to the flat yield curve, the FED is expected to try to steepen it by lowering short term rates (Fed Funds rate) in the September meeting, most analysts expect a .25% decrease, while other are expecting a .50% decrease.
If you are in a contemplating or currently in a floating rate loan tied to 30 day Libor or the prime rate, this will affect you the most. For those investors yet to close on these loans, we would suggest trying to negotiate floor rate removals to capture any decreases from the FED.
Commercial mortgage rates have largely benefited from the rate drops. While spreads have increased, they have not done so significantly so investors are receiving much of the drop in lower coupons. Spread widening is perhaps the biggest risk to investors today and this becomes an even greater risk if/when we start to see real recessionary data. Keep an eye on the high yield debt market, if trouble starts, it will show up there first and start to widen out commercial mortgage spreads. Right now we have not seen this happen, but it is something to certainly pay attention to (watching the exchange traded fund HYG is a good way to do this).
Commercial mortgage rates issue
Perhaps the biggest issue in rates in CRE right now is the dramatic pull back in Fannie & Freddie in the multifamily loan space. While they are still in business, we have seen dramatic spread increases, which make it impossible to do these loans in some cases. Investors should move to conventional CMBS loans or alternative products and negotiate terms that look as similar as possible to what they were getting with agency loans (yes you can get yield maintenance with CMBS).
With exception to the structuring changes at Fannie/Freddie, investors in commercial real estate have significantly benefited from the rate environment we are in. Commercial real estate investors today are finding the most value in the long end of the curve, by locking in long term fixed rates at similar rates to those are the short end. Keep an eye on spreads and FED actions as these will affect coupons moving forward.
