NEW YORK CITY—After the Barclays Capital scandal shed light on interest rate manipulation by global financial institutions, the impact on commercial real estate has yet to be seen. But given that many construction, short-term and bridge loans are priced over Libor, sources tell Real Estate Forum that it has the potential to add costs to borrowers across the spectrum.
"The manipulation hasn't been large enough to greatly impact the interest in loans that have been based on Libor, but certainly if I were a client with a construction loan or some type of bridge product that was floating over Libor, I'd ask my lender how much additional interest I had to pay because of this Barclays situation," Bill Hughes, SVP and managing director of Marcus & Millichap Capital Corp., tells Forum.
For much of the industry, the initial reports of Libor manipulation by large banks present a strong déjà vu to the economic crisis of 2008, where artificially low rates by major corporations went unquestioned by regulators, in particular, the New York Federal Reserve. Sam Chandan, president and chief economist at Chandan Economics, says that as the scope of the manipulation comes into focus, confidence in major financial institutions is necessarily undercut, opening a window for a more aggressive regulatory stance.
"Unfortunately, public trust in the adroitness and independence of the regulatory authority may be at issue, as well," he says, noting that disruptions are more likely in segments of the market where rates are not fixed, such as construction lending.
"We cannot say with complete confidence that Libor is being determined fairly and accurately," Chandan continues. "The structure of the Libor market—effectively an honor system—affords the possibility of malfeasance."
Hughes says two channels exist for real estate lenders: going the Libor route, which is dictated by market factors, or the prime rate route. "Libor-based deals are fairly low cost to begin with, and I'd certainly rather take a Libor deal than a prime-based deal." That's because Libor is more globally recognized and driven than prime, he adds.
Farzin Emrani, managing director with Los Angeles-based Lucent Capital, says that when LIBOR is low and borrowing rates are cheaper, the more favorable interest rate helps developers reduce their costs. "I'm not sure if there is a real impact on real estate because it's not like there's a lot of different options for banks or borrowers," he says. "A bank can choose to lend over prime instead of Libor. But I'd be surprised to see it happen."
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