With last week's inflation numbers coming in at close to 7% we can all expect a climb in the Fed Funds rate, but
price controls are not what we need now to fix inflation, as we are dealing with
supply issues driving prices upwards. And as Dr. Linneman mentions in this
WEBCAST that investments in real assets like Commercial Real Estate and Stocks provide investors at least a
"fighting chance" to combat inflation. We should all have both (but not bonds!) in our current portfolios if we are
looking for yield to hedge inflation.
Treasury rates are moving upward as well, yet lenders may only absorb only a small amount of the risk-free rate in their spreads, choosing to remain competitive and keep the deal flow moving. In the hot multifamily realm, fixed agency rates are hovering at 3.10% - 3.90% and it's still possible to a bridge loan in strong markets under 4.5%.
In terms of commercial, a smart move would be to not only watch LTV and DSCR sizing but also debt yields, which is the so-called "Lender's Cap Rate" and measures minimum return the lender would make if they needed to take back the property.
Debt yields are hovering (very generally) in the 7% - 9% range depending on the market, asset type, and quality as well as the loan product. By the way, lower debt yields mean that the lender sees less risk since comparatively, if the loan amount increases the debt yield decreases, much like a normal cap rate.
Speaking of cap
rates...let's put this discussion to rest.
On value-add deals, cap rates don't matter! There...I said it. And boldly. Many people are seeing compressed cap rates and wondering if we are approaching a market crash in commercial real estate.
Yet, on properties that have inefficiencies in rents, operating expenses or management, the going-in cap rate may be much lower than a comparable property that is already stabilized.
This is because the value-add property has somewhere to go beyond purchase in terms of increasing overall income, whereas the stabilized property is already maxed out. This potential increase or growth in cash flow can be viewed in terms of yield, which savvy buyers are willing to pay a premium for. You can read more about it, including some great examples in this blog post
HERE.
