As a value guy like you it’s hard to figure out how buying something in the sixes on cap rate works out to be a good deal. But what if the Fed is trapped at the Zero Lower Bound and we are turning Japanese? Their ‘Lost Decade’ is now old enough to graduate with a Master’s degree and we’re following the exact same playbook. I offer last week’s Fed decision as exhibit #1. They would dearly love to raise rates just to prove they can but there’s just thin ice between us and
For this month’s post on apartment building investment loan rates and the key 10yr Treasury (T10) we’re looking at the longer trend back to the beginning of 2013. The news has been full of talk about rising interest rates but looking at the chart above we can see that while the T10 is up off its recent low of 1.68% in the end of January it’s still more than 50 basis points below the highs it hit in September and December 2013 (2.98% and 3.04% respectively).
In turn the 10 year apartment loan we track has been treading water around the 4.3% mark for the last nine months and essentially it’s back to where it was in early 2013 before the Continue reading Treasury rates are up but…
Are interest rates caught in a Catch-22? What if the Fed is waiting to raise rates until the economy is growing stronger but the economy won’t grow stronger until rates go up?
For three years everyone has ‘known’ that interest rates were going up but other than during the Taper Tantrum of June 2013 which affected loan rates more than Treasuries, the T10 only moved up to the 2.75% area which was just picking itself off the floor of 1.66 where it got down to in May that year.
The 10 year apartment building investment loan rate we track moved up to 4.454% from 4.375% yesterday after flatlining at the old rate since the middle of January:
Even so it is still below what we used to think of as the 4.5% floor for this rate. Meanwhile the ULI rate has been tracking the 10yr Treasury, rising from 3.37% April 20th to 3.76% yesterday, a climb of almost 40 basis points.
Is this the beginning of the long anticipated (The 3rd or 4th year in a row that everyone’s known rates were going to rise) rate hikes? It makes sense that the Fed would like them to get up off the floor if for no other reason that they would have room to lower them again when they needed to. But is now the time to do that when China, Europe and the rest of the world are slowing down?
The apartment building investment loan rate we track remains at 4.375% where it landed back in the middle of January. Other than a brief one-week visit to 3.396% back in March which wasn’t even enough to move the chart line it’s been steady as she goes:
With the 10year Treasury dipping below 2% the spread has been widening as 4.375% seems to be the new 4.5%. Once again people are expecting rates to go up later in the year (is this the third or fourth year for that prediction?) but the Fed and the Government have been following the Japanese model step for step and their Ushinawareta Jūnen (Lost Decade) is old enough to drink and will be graduating college soon. I’m not sure why anyone thinks this time will be different just because we’re talking dollars instead of Yen. But there is this:
That men do not learn very much from the lessons of history is the most important of all lessons that history has to teach. – Aldous Huxley
Was quoted in a Multifamily Executive piece this week by Joe Bousquin Cap Rate Limbo: How Low Can They Go? discussing where we are in the apartment building investment cycle, whether multifamily cap rates could go any lower and how do you make a deal pencil in this environment. It’s a good quick read with apartment pros from around the country sharing their thoughts on how things stand. I really got a kick out of the Barbara Gaffen’s story about a Chicago property trading for $651,000 a unit.
After flatlining at 4.5% for over 10 weeks, the 1oyr apartment building investment loan rate we track dropped to 4.375% in the middle of January and has remained there since:
All this while the 10 year Treasury (T10) got within 2bp of the 1.66 posted back in May of 2013, causing the spread to widen to the two and a half range from two and a quarter. That in turn is causing the trailing 6 month average to continue its upward curve, now in the 2.25 range.
Once again apartment building investment loan rates have hit the hard boundary of 4.5% even while the 10yr Treasury (T10) falls back below 2% for the first time since May 2013. This is causing the 120 day average spread to begin bending upwards. Currently it’s 2.178% on the back of a 2.46% weekly spread as of Monday when the T10 was passing through 2.04% on its way to 1.96% yesterday:
The ULI <60 LTV rate has been bouncing in the 3.5-3.6% range but that’s a function of it being quoted on a spread basis and the only change there since the middle of November was when it dropped 1 basis point (1bp) in the middle of December; chalk it up to holiday season hibernation.
The 10 year apartment building investment loan rate we track has returned to its old boundary of four and a half percent despite Treasuries in the two and teens again at the end of November. On the 28th the T10 was within 1pb of the mid-October Massacre low of 2.17. Something had to give for the loan rate to get back to the 4.5% range and it was the spread which jumped above 2.25 last week for the first time since February:
The spread has gone from the Massacre low of 1.93 to 2.28, a 35bp climb in only seven weeks. Meanwhile the ULI <60%LTV last week was 3bps below its mid-October low, tracking the Treasury with a consistent spread of 1.38 in four of the last five weeks.