Debt Rules as Mortgage Spreads Stay Flat

Alex Finkelstein is co-editor of Debt & Equity Journal, from which this article is excerpted.

Chicago—As the final quarter gets under way, lenders continue to compete on projects in almost every category, the Real Estate Capital Institute reports. “There has been an insatiable demand for all types of debt, including first, mezzanine and participating loans while commercial real estate markets continue growth and expansion,” notes RECI research director Nat Zvislo. The commercial activity is compensating for the slowdown in housing markets, he says.

Mortgage rates on most property types stayed flat within the 5.5% to 6.25% range, Zvislo notes. For the first time since June 2005, Treasury markets “continued more than a two-month rally, although short-term rates for Prime and Libor remained virtually unchanged,” he says. The longer-term Treasuries dropped about 10 basis points to about the same level as a year ago. “Narrow spreads between five-year and 10-year Treasuries hovered at about five basis points,” Zvislo says.At the third quarter meeting of the Real Estate Investment Advisory Council‘s southeast region in Atlanta, national lenders revealed how they handle loan-to-cost and loan-to-value factors on main real estate product types. “The inexpensive mezzanine debt and equity that’s out there has put us in a position where we can get a little more equity invested in construction deals,” says Tom Butsch, executive vice president and manager of Regions Financial Corp.’s income property group in Atlanta. “On office and industrial, we’d like to see 20%. On multifamily, we’re lucky to get more than 15% because it’s still a hot product. On anchored retail, we’re seeing loan proceeds as high as 95% and that 5% equity is a deferred development fee, so it’s really 100% financing.”