Debt corner : Increased multifamily financing competition
The recent 75 basis point move in the treasury has created a new dynamic in multifamily financing . As indicated in the chart “ 10-year UST vs . FNMA DUS 10 / 9.5 Spreads ” the spread for Fannie financing has stayed relatively flat while the UST has increased dramatically . The impact of the move in the UST has two significant implications . For starters , in low cap rate core markets the increase in the rate can significantly limit the proceeds available due to coverage limitations . Assuming a 4.5 % cap rate a Tier 2 loan is limited to sub 60 % LTV compared to Q3 2016 in the 65 % range 1 . The second impact is the increased competition from insurance companies and banks on the lower end of the leverage level . Spreads have stayed constant , but the increase in the UST has removed the limiting factor of floor rates required by Insurance Companies . Current owners looking at financing a multifamily property need to test the market from various capital sources to ensure the best execution .
1
Example does not take into account “ Green ” financing which reduces the spread by 15 – 40 basis points .
. 750 % |
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. 250 % |
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. 750 % |
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. 250 % |
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02-04-2016 03-04-2016 |
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07-04-2016 08-04-2016 |
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10-04-2016 11-04-2016 12-04-2016 01-04-2017 |
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10-year UST vs . FNMA DUS 10 / 9.5 spreads |
10-year UST |
10 / 9.5 DUS Spread |
Source : JLL and Bloomberg |
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Rate
1.50 % 1.25 % 1.00 % 0.75 % 0.50 % 0.25 %
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1-Month Libor Forward Curve :
The following chart tracks the change in Libor expectations over the previous quarter
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0.00 % |
Source : Bloomberg |
Current
Year 1 Year 2 Year 3 October 2016
January 2017
6 THE NEW ENGLAND INVESTOR