Commercial Lending: Treasury Rates and Financing Strategies

Even though August's job numbers released on September 6th were weaker than expected, the Ten Year US Treasury only demonstrated a moderate gain. The Ten Year Yield which moves in the opposite direction from price, only dropped seven basis points to 2.93%. With the weaker than expected job report data for August, some economists are arguing that the recovery is weaker than expected and that the Federal Reserve should maintain its Quantitative Easing. It is estimated that the Federal Reserve is currently purchasing approximately $85 billion in US Treasuries on a monthly basis. Hinting its intent to curtail these purchases has increased the Ten Year US Treasury Note from 1.65% in May to the current 2.93% level. This represents an astonishing 78% increase in only four months. Other economists believe the monthly job reports fluctuate naturally on a monthly basis and it is best to average the trend, as opposed to focusing on the actual monthly figures. This is where we find the treasury markets today. The markets are reflecting a recovering US economy coupled with less Federal Reserve bond purchases. This represents a double edge sword. When interest rates were at historical lows, many institutional lenders stayed on the sidelines unwilling to put out long term money. Interest rate floors, wide spreads and conservative loan to values were the norm in that historically low interest rate environment. Today, with treasuries increasing in light of a perceived economic upturn, institutional lenders may be willing to get off the sidelines and back into commercial real estate lending. As the fourth quarter and year end for 2013 rapidly approach, commercial real estate lenders are already putting their sights on 2014. Look for institutional lenders to offer more forward commitments for quality products. Forward commitments can lock in an interest rate for between 12-24 months. Forward commitments are an excellent tool for substantially leased projects coming off construction loans or for properties requiring financing by a specified date. Multi-family borrowers recently learned that Freddie Mac has introduced a new Index Lock program. This program allows certain qualified borrowers to lock in the Interest Rate Index (usually 5, 7 or 10 year US treasuries) during the application process. This recently announced feature helps eliminate interest rate risk during the 60-90 day application to funding process. Another program which may see an increase in availability as interest rates rise, are Fixed Rate Construction/Permanent Loans. Fixed Rate Construction/ Permanent Loans totally eliminate interest rate risk for new construction or substantial rehab projects. Most institutional lenders offering this program, begin in the $10 million range. Preleased office and retail will be the largest beneficiaries of this financing tool. However, apartments and even hotels in strong markets may be able to secure fi xed rate construction/permanent financing as well. In summary, we speculate that as US treasuries rise in an improving economy, more money will fl ow into commercial real estate. We also believe that as the economy improves, we may see more Forward Commitments, Early Rate Lock Programs and Fixed Rate Construction/Permanent financing structures available for commercial real estate investors and developers. NorthMarq, headquartered in Minneapolis, offers commercial real estate services for investors, developers, corporations and tenants. The company provides mortgage banking and commercial loan servicing in 32 offices coast-to-coast, with an average of $7 billion in annual production volume and services a loan portfolio of nearly $40 billion. NorthMarq manages more than 60 million sq. ft. of retail, industrial and office space in 22 markets around the country and handles more than 7,500 leasing, sales and mortgage banking transactions annually. For more information, please visit www.northmarq.com. Sam Berns, Managing Director NorthMarq's Upstate Regional Office, Rochester, NY, 585-262-2100, www.northmarq.com