In the last 30 days, two significant events occurred that greatly impact Commercial Real Estate investors. First, the Fed cut interest rates, and second, the yield curve inverted. How these events ultimately impact CRE in the long term is a discussion for another day, but for now, long-term permanent placement debt has become considerably cheaper. By way of example, a loan we were working on 3 months ago was pricing at an all-in rate of 4.35%, fixed for 10 years. The transaction ended up taking longer to come together and delayed the execution of the deal. When our team went back to the market, with the same cadre of lenders, the new rate we were able to achieve for the subject sponsor came in a 3.58%, a saving of more than .75%.
During the three months in between initially quoting the subject deal, and engaging the lender this past week, the spread of the loan went from 1.85% to 2.12%, an increase of .27%, so why then did the rate drop, despite the increase in the spread? Simple, the 10-year swap rate, which was used as the index for the lender providing the above terms, started at 2.50% but is now presently hovering around 1.40%, an astounding drop in a very minimal period of time. As such, despite credit spreads widening, the index rate has contracted so significantly, that the total coupon rate is the lowest it has been in years.
If you have been considering refinancing an existing asset or making an acquisition, the time to lock in an excessively low rate, long term debt is now! Please feel free to reach out to the Hart Capital team for a complimentary review of any proposed transactions that you may be considering.
Author: Seth Denison, Senior Managing Director