As the Federal Reserve tapers its rate-lowering bond purchases, what movement should borrowers expect ahead in the benchmark 10-year Treasury yield—and in turn long-term mortgage rates?
Well, there doesn’t appear to be a clear consensus.
Some multifamily finance pros question whether the presumed softer bond demand will have much if any impact on the key index. Others expect at least moderate upward movement in the Treasury yield—perhaps into the mid- or higher-3 percent range over the course of the year.
Adam Allen, Houston-based managing director with Atlanta-headquartered Apartment Realty Advisors’ capital markets group, wouldn’t be surprised if the tapering gradually nudges the 10-year Treasury yield up to the mid-3 percent range in 2014. And logic would have apartment lenders in turn quoting moderately higher fixed coupons as Treasuries rise.
But based in part on the Fed’s stated concern with potential deflation, Jeff Day, CEO of Bethesda, Md.-based Berkeley Point Capital, thinks the 10-year yield might not get much higher than 3 percent by mid-year.
Even if the 10-year Treasury approaches 4 percent by year-end, multifamily borrowers would still operate in a good long-term rate environment, relates Susan Persin, a Trepp managing director in Oakland. “Rates have a long way to go from today’s levels to reach anything you could consider high by historic standards.”
Even more reassuring for many multifamily borrowers is the Fed’s stated intention to keep its short-term “overnight” federal funds rate as low as it can indefinitely—or at least until the unemployment rate and other indicators are far more favorable than they are today.
Libor of Love
Accordingly the indexes against which lenders quote construction and bridge loans—Libor primarily—are almost certain to remain near their unprecedentedly low prevailing rates.
And given that Libor rates ended the year below one-fourth of one percent, an unexpected rise of 50 or even 75 basis points (bps) over the course of 2014 is unlikely to have any meaningful impact on short-term financing activity, Day suggests.
Nevertheless experts anticipate growing caution—among construction lenders especially—at least in some heated markets where new-supply pipelines are lengthy and rent growth is consequently “plateauing,” says Jason Koehn, chief investment officer at Farmington Hills, Mich.-based developer/operator Village Green Cos
In fact, the prospect of construction-loan proceeds becoming more constrained by lender concerns has Village Green seriously exploring its life company relationships for a construction-to-permanent financing transactions.
“We haven’t done one yet, but the likelihood we will is increasing,” Koehn acknowledges.
Many banks continue quoting construction loans for promising developments generally in the low-200 bp range over Libor, with proceeds often amounting to 80 percent of cost, Koehn specifies. Lenders are limiting loan proceeds based on factors including their calculations of debt yields (especially), along with their maximum allowed loan-to-cost and stabilized loan-to-value ratios, Koehn explains.
Berkeley Point’s Day adds that competition over construction financing packages for solid multifamily developments typically comes down to the most attractive combination of high proceeds and minimal recourse requirements.
Koehn also points out that short-term bridge-type debt for value-add acquisition/repositioning ventures remains generally plentiful and affordable. Village Green’s banks underwrite and price bridge loans for value-add ventures quite similarly to construction facilities, he adds.
Meanwhile, in cases in which owners facing maturities aren’t able to secure sufficient new first-mortgage proceeds to cover entire outstanding balances, more costly mezzanine-type capital is available to fill the gap.