Market Update Q2, 2018

Between potential trade wars with China, financial market volatility, and major changes in tax law, 2018 has proven to be nothing short of exciting. The following are Q2 trends that we have identified amidst these market gyrations.

1. Interest rates for long-term fixed-rate loans continue to remain low. While adjustable rate loans based on U.S. Prime and LIBOR continue to adjust upward, interest rates for benchmark 10-year fixed-rate loans currently range between 3.90-5.00%.
2. Markets for the major loan segments remain liquid:CMBS
   After a stable 2017, the CMBS market remained strong in Q1 and looks to continue that path for the balance of 2018. Issuance in 2017 reached approximately $95B compared to approximately $75B in 2016. CMBS lenders are continuing to be aggressive in the second quarter of 2018. Most loans contain at least partial interest-only terms and most 10-year term loans are being placed with 4.50-5.25% coupons.

   Life Insurance Company
   Life insurance companies are “asset allocation” lenders that compare the relative value of investing in commercial real estate loans to investing in other assets. Current yields on most commercial real estate loans are higher than what life insurance companies can obtain by investing in high-quality bonds. Every life insurance company has a different profile of loan types that they invest in. The commonality is that they typically hold most or all of the loan on their books as a long-term investment. This can make them more cautious than other lenders such as CMBS players who make loans for reselling rather than holding long term.

   Bank
   Although the bank sector has become more conservative over the past few years in the construction loan business, they are quite active in making bridge loans and short-term loans on stabilized properties. As some banks continue to offer 10-year fixed rate terms with competitive rates, we expect to see their focus shift to the origination of 5 and 7-year term product as we move further into the cycle.

   Agency
   Agency lenders are forecasting another strong year for 2018. Many of their unique programs cannot be matched by the other lending segments. Agencies are being very aggressive on affordable housing, mobile home communities, and properties that can become greener. Additionally, agencies have continued to compete in secondary and some tertiary markets where other lenders have stayed away.

3. Most major MSA’s throughout the United States remain attractive origination grounds for lenders.
4. High liquidity in the market has created flexible terms for borrowers. Loans are currently available with features such as flexible prepayment penalties, interest only (when leverage permits), and high leverage.