Property owners are furiously trying to take advantage of plunging interest rates by attempting to lock in long-term mortgages.
“The phone is ringing off the hook, as you might imagine,” Andrew Gnazzo, managing director of multifamily finance at intermediary firm Walker & Dunlop, said at the “Financing Multifamily Through the Capital Markets” panel of the CRE Finance Council’s High Yield & Distressed Realty Assets Summit in New York.
Interest rates have plunged over the last few weeks as the concerns grow about the spread of the coronavirus around the world and the impact on the global economy. The 10-year Treasury rate slipped below 1.0 percent for the first time ever this week, after having been as high as 1.63 percent as recently as Feb. 12. This happened just after the Federal Reserve held an emergency session to cut the interbank lending rate by 50 basis points.
It may be too soon to judge the ultimate impact of the coronavirus on the economy but borrowing rates have never been lower and property owners are eager to take advantage. Panelists said that agency lenders received more than $7 billion of loan quote applications last week, more than double the normal weekly amount. Amanda Nunnink, vice president of investor relations at Freddie Mac, said about 90 percent of the requests are fixed-rate and about two-thirds are refinancings.
Freddie wins on average just under 40 percent of the deals it quotes, but at the same time both government-sponsored enterprises are subject to a cap of $100 billion of loans in the five quarters between 4Q19 and the end of 2020, so they must decide how to handle the extra requests. At times in the past, the GSEs have raised spreads in order to slow the pace of originations so as not to burn through allocations too quickly.
Nunnink said the agency has increased spreads in recent weeks and has maintained a floor on the all-in rate that is 15 basis points below where loan rates are set. Loan rates can change from the time of the application to when the rate is locked in. If market rates rise, then the loan is set at the higher rate. Freddie’s floor means the locked-in coupon cannot be more than 15 basis points below the rate at application, even if market rates drop more than that.
Controlling the Spigot
Fannie Mae last week implemented a Treasury floor of 1.3 percent, and then lowered that to 1.1 percent this week. That means that the loan coupon is 1.1 percent plus the loan spread, even if the 10-year Treasury rate is below 1.1 percent.
Gnazzo said the GSEs are trying to avoid burning through their allocations too early in the year. “They’re trying to not get into a situation like last year, when they spent way too much money (early in the year) and had to take themselves off the market,” he said.
The rush to lock in debt is not only for multifamily properties. All lender categories—commercial banks, CMBS programs, insurance companies, debt funds and more—are trying to take advantage of the demand. “Everyone out there is pushing as hard as they can,” said one New York-based loan broker.
Lenders must consider how low they are comfortable going with loan coupons and how aggressive to set terms in the event the coronavirus does spark a downturn in the economy. Low coupons mean that borrowers can borrow more proceeds with lower monthly payments, which might not be an issue during the loan but could become a problem at refinancing if rates are higher and property income is lower. Some lenders have set rate floors of 3.0 percent or more, but some high-quality loans—with stable income, with institutional borrowers in good markets—are getting completed with coupons in the high-2.0 percent range.
Low Rates Solve Ills
Speaking on a different panel at the HYDRA summit, Morgan Stanley managing director Richard Hill said he had a bearish outlook about commercial real estate a few years ago when the 10-year Treasury rate was at 2.0 percent because he thought the decades-long steady and gradual decline in interest rates was coming to an end.
Hill said he expected rates to go back up to the 4.0 percent range, which could create problems in the market, especially if property level income dropped in a downturn. Rates have generally continued their downward arc, however, which helps to paper over fluctuations in net operating income. “Lower interest rates solve a lot of ills,” he said.
CREFC Executive Director Lisa Pendergast, also speaking at the HYDRA summit, noted that the coronavirus will have the most immediate impact on property types with short-term leases, such as hotels and coworking offices, while retail is sure to come under pressure if the economic effects linger. Corporations are cancelling worker travel, and some are encouraging employees to work from home.
Pendergast noted that measures of volatility have spiked after being low for the entire year in 2019 and said volatility would continue until the dust from the potential pandemic settles. “We live in a boring world no more,” she said. Volatility also means that lending conditions could change on a dime. “Everything we’re talking about can change by 4 o’clock this afternoon,” joked Michael Zaremski, a mortgage banking director at Berkadia and panelist on the agency lending panel.