The apartment building loan rate we track remains in the 4.6-4.7% range where it’s been since the middle of July. Meanwhile the ULI <60% LTV loan rate has fallen 10 basis points over the same period with its spread to the 10 year Treasury coming in from 1.32% to 1.27%. That’s a very slim margin indicating a very competitive market for those loans. Typically the 10yr apartment loan rate loosely tracks the ULI rate with a lag so we’re hoping to see the rate come in a little more for deals closing in the next few months.
While everyone seems to ‘know’ that rates must be going up influential economist Anatole Kaletsky (the Kal in GaveKal Research) makes a pretty convincing argument that the central bankers in the US, UK and Europe will be following their contemporaries over at the Bank of Japan, keeping rates ‘lower for longer’ in a piece out this week from Evergreen/GaveKal. Note that registration is required but they will only send you the weekly ‘Virtual Advisor’.
About the spread between the T10 and the apartment building rate we track, the green line on the chart represents the six months trailing average spread. We track changes in the trend for signs apartment lenders becoming more or less competitive. Note that since rates are only quoted on business days the chart averages the last 120 business days which equates to roughly six calendar months.
We track the 10 year Treasury (T10) because that is the benchmark most lenders base their long term rates on. In order to lure investors away from Treasuries to buy mortgage bonds lenders have to offer a premium (AKA ‘spread’) over what can be earned on the Treasury. So when the T10 moves, rates on all kinds of longer term loans including on apartments tend to move also. As you can see in the chart, the spread also widens and narrows as market forces make an impact.
Notes about the apartment loan rates shown in the chart above: The rates shown here are from one West Coast regional lender for loans on existing apartment buildings between $2.5 – 5.0M. The rate quote they send every Monday that I track is a 30 year amortizing loan with a fixed rate for 10 years (They also have other fixed periods at different rates). The max LTV for this loan is 75% (they have an even lower rate on their max 60LTV loans) and the minimum Debt Cover Ratio (DCR, aka DSR or DSCR) is 120. Note too that these are ‘sticker’ rates, LTVs and DCRs and ‘your millage may vary’ depending on how their underwriting develops. I usually figure that we’ll end up at a 70LTV which also helps the debt cover and provides a larger margin of safety, which is half the battle from a value investing standpoint.
The prepay fee is 5,4,3,2,1% for early repayment in the first five years and you do have the ability to get a 90 day rate lock. The minimum loan is $500k (at a slightly higher rate for less than $1M loans) and they’re pretty good to work with as long as you go in knowing that it takes up to 60 days to close their loan. If you are looking at acquiring an apartment building in California, Oregon or Washington I’d be happy to recommend you to my guy there for a quote. Send me a message through this link and I’ll make an introduction for you.
The other rate we track is the from the Trepp survey which the ULI (Urban Land Institute) reports on. According to the ULI the Trepp rate is what large institutional borrowers could expect to pay on a 10 year fixed rate, less than 60% LTV loan for a “crème de la crème” core property located in a gateway market. We track this rate as a barometer of what the largest lenders are offering their best customers on the most secure loans for any advanced warning about future rate and spread changes. Note that the spread we chart is between 10yr loan we track and the T10.
How the St. Louis Fed calculates the 10 year Treasury rate displayed above: “Treasury Yield Curve Rates. These rates are commonly referred to as “Constant Maturity Treasury” rates, or CMTs. Yields are interpolated by the Treasury from the daily yield curve. This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. These market yields are calculated from composites of quotations obtained by the Federal Reserve Bank of New York. The yield values are read from the yield curve at fixed maturities, currently 1, 3 and 6 months and 1, 2, 3, 5, 7, 10, 20, and 30 years. This method provides a yield for a 10 year maturity, for example, even if no outstanding security has exactly 10 years remaining to maturity. For even more detail see: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/yieldmethod.aspx
As a reminder, one basis point or 1bp is equal to one-one hundredth of one percent or .0001. When you hear ‘fifty basis points’ that’s one-half of one percent; ’125bp’ would be 1.25% or a percent and a quarter, sometimes referred to as ‘a point and a quarter’. A bp seems like a tiny number, too fine to make a difference but in the debt world if you can squeak out an extra 20bp on a 100 million dollar deal (like a pool of apartment building loans) that’s $200,000.00 in your pocket. To paraphrase Everett Dirksen: “20bp here, 20bp there and pretty soon you’re talking about real money.”
Filed under: Apartment Building Investment Cycle, Multifamily Investments
Do the pitches you’re getting on apartment investment deals sound like this lately?
LOL but true right? Have a great weekend; we’ll think about what happened last time prices got this crazy next week-
Apartment building investors should be looking at renovation, value add and repurposing deals according Freddie Mac’s David Brickman, EVP for Multifamily Business. In an Executive Perspective note published last week Brickman covered these points:
- Demographic forces alone could create as many as 4.7 million more renter households by 2023.
- That even the 3.1 million new units expected over the next 10 years will not be enough to meet demand.
- Compounding the issue, the existing rental housing stock is aging. Nearly 60 percent of U.S. rental properties with 20 or more units were built before 1980.
- Supply already could be 1.5 million
Filed under: Commercial Real Estate, Multifamily Investments
CoStar is out with their latest Commercial Repeat Sale Indices (CCRSI) showing that:
- Commercial Real Estate prices post double-digit annual gains in May
- Momentum picks up in the General Commercial segment
- Improvements in market fundamentals underpin growth in commercial property pricing
- Capital flows remain healthy
- Distress levels continue to dissipate
- See link for numbers and details-
CoStar has been tracking the indexes of repeat commercial real estate sales since 1996. Note that the Value Weighted index is driven mostly by core properties while the Equal Weighted index is mostly driven by smaller, non-core property sales.
For apartment building investors the good news is that Read more
Filed under: Multifamily Investments, The Economy and Current Affairs
REIT.com had a piece called REIT Returns Outpace Broader Market in Solid First Half Showing out late last week and the part that caught my eye was the section titled: Apartment REITs Lead the Pack in First Half:
- Apartment REITs were the strongest performers during the first half.
- Total returns as of July 7 in the sector stood at 23.8 percent.
“There was increasing comfort in the market that fundamentals in the [apartment] sector were not decelerating as fast as many had feared,” said James Sullivan, managing director at Cowen & Co.
Apartment REIT managers are some of the best multifamily operators in the world and it pays to pay attention to what they’re doing. Unfortunately the returns on REIT shares are too often driven by capital flows from the stock market rather than the pure performance these managers generate. Patient contrarian investors can be rewarded however by waiting for apartment REITs to fall out of favor with stock market investors and pick them up at bargain prices.
Click on the image above or use this link to see the article on REIT.com: REIT Returns Outpace Broader Market in Solid First Half Showing
The apartment building loan rate we track came in today at 4.765% (see below for loan details), making it 22 straight weeks below the five percent mark. The spread to the 10 year Treasury (T10) also remained in the 2.1 and change range where it’s been since the beginning of March, indicating that the very competitive market for multifamily loans continues on.
For the gold plated ULI less than 60% LTV loan the spread dropped into the 1.2s from the 1.3 range where it had been holding since late February, taking the implied rate for these core institutional apartment loans down to 3.77%.
Speaking of the spread between the T10 and the Read more
That happy feet sound you hear is coming from apartment building investors as they see their results from the second quarter:
- Rents Up
- Vacancy Down
- New Supply Being Absorbed as soon and it’s built
Here’s the video report from MPF Research:
And it’s not just the usual Read more
Filed under: Multifamily Investments, The Economy and Current Affairs
A MacArthur Foundation survey conducted by Hart Research Associates shows that 70% of Americans polled think that the housing crises isn’t over and 19% think the worst is yet to come, good for apartment building investment I believe. As reported by the Wall St. Journal in an article titled: Allure of Homeownership Slumps Amid Worries of Continued Crisis the worst is yet to come figure is unchanged from last year, which may reflect a segment of the population that has been deeply scarred by collapse of the lending and housing bubbles. The still in the crises figure is down from 77% a year ago but it is still a big number that’s having a positive effect on apartment demand:
Referencing the chart above, the article stated that 51% of those polled said renting was more appealing than in past decades which is definitely positive for apartment building investors. Note that while urban apartment demand and development has been getting a lot of action, 35% of suburbanites think renting is Read more
The apartment loan rate we track popped up into the 4.70s today after spending the last three weeks in the 4.60s. Today’s 4.71% rate is about the same as it was a year ago, just before the taper tantrum hit. Monday quotes on the 10 year Treasury have climbed two weeks in a row now but remain below most recent highs of March, clocking in at 2.62 today. The downward march of the spread has flattened recently in the 2.0 – 2.15 range, including today’s number at 2.14. The ULI <60%LTV rate still looks like someone bouncing a ball down the stairs but their data is lagged a week so we’ll have to check back on Friday to see if that rate is going to tick up as well.
Speaking of the spread between the T10 and the ten year apartment loan rate, now that Read more
Filed under: Commercial Real Estate, REOs to Rentals- Single Family, Tom Barrack
Tom Barrack over at Colony Capital put up a nice presentation of where he sees the opportunities for real estate investment in the current market. While Colony is geared to serving their large institutional investors, those of us operating on a smaller scale can benefit from Tom’s insights as well.
My Exec Sum of the opportunities he sees that I think will impact smaller investors in North America (and my comments in parentheses):
- Commercial and residential real estate are great investments today because equities and debt are mispriced and the economy is regaining its feet. (There will be competition however).
- Distressed debt in the US is diminishing but they are continuing to resolve non-performing assets (which can create deals for long term holders as these turned around assets come back to the market).
- Single family residential for rent housing is stabilizing and becoming a institutional asset class (which can provide exits for those who have built portfolios of these properties).
- Mezzanine debt and what he calls ‘stretched senior debt’ is becoming more available for value add & opportunistic deals because institutional investors such as pension funds need the extra yield (it will be easier to finance turnaround commercial properties at higher LTVs).
- It’s a time to avoid Read more