Two months ago, this column highlighted several developing conditions with the potential to ease lender concerns about the economy’s direction. We also made a prediction that interest rates on commercial real estate lending would begin to stabilize – and perhaps even decrease this quarter – as lenders factored lessening risk into their outlook.
Nailed it.
That is to say, we are happy to report anecdotal evidence of lenders agreeing to interest rates 50 basis points or more below the rates typically quoted in December. Specifically, Ascension advisors closed three sales of triple-net-leased properties in January with an aggregate value of about $18 million. Our Capital Markets team sourced debt to finance the transactions at interest rates near 5.5%. That compares with interest rates of 6% or more on loans closed in the final months of last year.
Easing volatility
Several factors contributed to this welcome reduction in debt costs. One was a New Year bond rally that saw investors selling stocks to purchase bonds. As a function of supply and demand, the surge in buying helped to lower yields on an array of bonds including those that serve as rate benchmarks for commercial real estate lending. The 10-year Treasury yield, for example, stood at 3.49% on Jan. 26, down from 3.88% at the end of December and well below the recent high of 4.25% it reached in October.
This coincided with an influx of lenders to the real estate sector. This gave borrowers more options and created competitive pressure on debt providers to offer the most attractive rates. The combination of competition and shifting benchmarks is enabling many borrowers to secure debt financing for commercial real estate between 5.5% and 5.99%, as our recent closings confirm.
Transactional advantages
That is good news for buyers and sellers alike. Today’s lower-cost debt will enable investors to refinance or acquire real estate and achieve returns that may have been unattainable to them just months earlier. Sellers benefit from the growing ranks and increased purchasing power of investors in the market seeking to make acquisitions with debt financing.
Sellers and their listing brokers price commercial properties for sale based on the returns they expect a buyer to require in the current market. In the fourth quarter, when lenders were typically charging more than 6% interest on new loans, many sellers felt compelled to lower asking prices to bring their offerings within reach of leveraged buyers.
The recent easing of debt costs means buyers can pay more for a property and still achieve a desired return, so sellers can set a correspondingly higher asking price on their real estate. That makes this an excellent time for investment bankers to partner with Ascension and advise their clients to offload real estate, or to sweeten an upcoming merger or acquisition by monetizing real estate equity with a sale-leaseback transaction.
Contact us to discuss your opportunities to execute a real estate strategy during this period of improved pricing and market stability. After all, there is no telling how long it will last.
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