Commercial/Multifamily Financing Update
Just when we were hitting our year-end stride, Treasuries are back to July levels after the Fed Outlook changes. We could feel the momentum changing – deals getting done, cap rates dropping, and a push for a strong 2025. A resilient economy, high issuance of US debt, and a higher probability of a Trump Win/Trade are all contributors to the sentiment pushing yields higher this past week.
Expect continued volatility with several reports before the November Fed meeting: Sep JOLTS report (10/29), Sept ADP employment (10/30) and Oct Employment (11/1). Stay tuned!
We have highlighted several resources and publications below, designed to offer insights into the constantly evolving market and their impact on the real estate sector.
Treasuries Extend Slide as Traders Worry About the Bond Market: “People are worried about the bond market now,” said Suhail Shaikh, CIO at Fulcrum Asset Management, which manages $7.7 billion. “The Fed had been priced too aggressively in markets in terms of rate cuts relative to what the economy really needed.” Read More
A Billion Square Feet of Space to Emerge As Office Market Faces Major Crisis: “The banks are going to have to dispose of that real estate,” Richard Barkham, chief global economist for CBRE, said in an interview with Business Insider. Read More
Property Prices May Be At—Or Near—Bottom: Industry CPPI data suggests that property prices may be at—or near—bottom. The three major indexes from MSCI Real Assets, CoStar, and Green Street all showed an increase in CPPI in August. Read More
Cap Rates Adjust as the 10-Year Treasury Yield Fluctuates: On average, for every 100 basis points change in the 10-year yield, cap rates shift in the same direction. Read More
Multifamily Borrowers Bank On Alternative Lenders: New capital sources come to the rescue and gear up for a revived transaction market. Read More
San Diego’s life science startups continue to drive more than $1B in venture capital deals: Life science startups continue to drive San Diego’s deal making in recent months by, once again, generating more than $1 billion in funding. Read More
Build-to-Rent Residential Market Overview
Executive Summary This report provides an overview of the U.S. Build-to-Rent (BTR) residential sector and answers the following questions:
What is BTR?
What does a typical BTR property look like?
Who owns BTR assets and how do they perform?
How do BTR properties compare with traditional multifamily properties?
BTR residential development is helping to alleviate the nation’s housing shortage. BTR properties have all the characteristics of single-family homes but are built for renters who want features not typically offered by multifamily properties.
Most BTR communities consist of 50 or more homes or townhomes that operate similarly to multifamily properties. However, unlike apartment buildings, BTR homes do not have any units attached above or below them. BTR communities generally are owned by groups of investors and are professionally managed, often with shared amenities and an on-site leasing office.
BTR is a subsector of the broader Single-Family Rental (SFR) market, which includes scattered homes for rent that are mostly owned by individual investors.
BTR is a particularly attractive option for millennials, who are reaching the prime age for major life milestones like child-rearing but can’t afford homeownership. BTR also is an appealing option for empty nesters who want the financial flexibility and lifestyle ease of renting versus owning. Both cohorts are driving strong demand for large BTR developments.
Favorable fundamentals and scaling of the BTR market over the past five years have attracted many institutional investors to the sector.
BTR Product Groupings
Debt Market Sentiment
With CBRE's nationwide proprietary data sharing system we are able to keep a pulse on the everchanging debt market.
Fed Watch: Treasuries have risen nearly 50bps in the past month due to a reduction in the probability of a recession. Recent economic data has been stronger than expected and is causing the market to reconsider the pace at which the Fed may cut. Earlier this week, Fed officials hinted that interest rates might be higher in the longer term.
The biggest unknown for markets is the outcome of which party will take control of the White House and Congress in November. Both candidates are promising more spending without a clear plan for deficit reduction. That uncertainty alone has added to some of the move in yields. [1]
Currently, futures markets are showing 92% chance of a 25bps cut in November. However, the market is expecting the Fed to cut at a slower pace into 2025. Before the next meeting, there are several upcoming catalysts for potential rate volatility including the Sep JOLTS report (10/29), September ADP employment (10/30) and Oct Employment (11/1). Odds off a rate cut from the FOMC can be tracked on the CME Fedwatch Tool.
Life Companies: Allocations for the end of the year are looking modest as they focus on money in 2025. Corporate bond spreads (the baseline for LifeCo pricing of alternative investments) have been stable. We are seeing quotes rates between 5.50% to 6.40% for 65% leverage or less. Life Company spreads are around 140-225bps depending on deal size, profile and leverage. Most are still 60% or less for best pricing in the low 5% range.
Banks: The normalization of the yield curve will continue to drive more appetite for banks. Deposits and relationships are still important but expect banks to continue their recovery and become more active. We are seeing quotes in the 6.00-6.60% range for deals with steady collections and a strong tenant mix. Banks on their fixed rate programs for core deals are 3, 5, and 7-year fixed rates with a step-down prepay. Floating rate options are around 275-350bps + SOFR.
Debt Funds: are looking to be more active and our client have pursued debt fund money now that SOFR continues to drop. Leverage is around 60-70% loan-to-cost with primary focus on stabilized debt yield and in-place cash flow or lease up deals for multifamily or industrial product types. You can expect to see spreads range between 265-425 bps over SOFR. On the multifamily side, many groups are actively pursuing preferred equity positions behind agency senior loans.
CMBS: prefer 10-year terms as 7- and 5-year terms are more difficult to price. The question remains around spreads: while it generally takes longer for the CMBS market and some of its participants to react, CMBS spread moves have been relatively contained over the past few days, on both new issue and secondary sides. We have seen rates around 6.50-7.50% depending on lean size, quality, property type and debt yield. Loan terms are anywhere from 5- to 10-years, fixed rate, up to 75% LTV and often full term IO.
Agencies: Freddie Mac will hit their cap this year! Fannie Mae still has room this year. Flows have been high and that is pushing spreads and terms to more conservative levels. That said, all in terms are the best they have looked in years.
Fannie Mae's new business volume through September is at $32.5B, compared to $41.7B last year, while Freddie Mac business volume is at $35.1B compared to $32.4B last year. Overall, Agency pricing is around 5.50-6.15%. Rate buydowns are becoming a more effective alternative for borrowers given the current environment driven by volatile benchmarks. With a buydown, rates can drop to as low as 5.20-5.60%.
Our team is here to help you navigate financing options and provide color on what we are seeing in today's market.
[1] www.barrons.com/articles/treasury-yields-election-deficit-fed-395917bf
Historical Cap Pricing
The chart below illustrates how cap pricing has changed over the past 2 years.
Cap Costs are the lowest it has been over the past 2 years!
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Today's Rate Snapshot
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USD LIBOR and SOFR Forward Curves
Indicative Rate Cap Pricing for Agency ARMs
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For More Information, Please Contact:
Bill Chiles | Vice Chairman | +1 858 646 4735 | bill.chiles@cbre.com
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Entrepreneur /Real Estate
2moNow that the money (stimulus, inflation) supply has worked through system, stability noticed, better control on inflation and the economy, investor sentiments on good track, tax programs in place the CRE market great for ROI. The CAP rates seen more on lower than higher. But, also opportunity for buying properties with higher CAP rates as not only profitable today it taps into repositioning and timely for future demand, improved ROI.
Scott Peterson excellent information. The market is really fluid. I hope to see rates come down in the new year
Recognition Award and Deal Toy Expert | Design, Production and Manufacturing
2moThis recent shift in Treasury yields is a clear reminder of how fluid the market is, especially with the Fed’s outlook influencing so much of the momentum. The disconnect between SOFR swaps and treasuries presents some unique opportunities, particularly for those CRE players who are agile and prepared to capitalize on favorable rates. The volatility, especially with several key economic reports looming, will undoubtedly push some to reconsider their strategies heading into 2025. It's interesting to see how cap rates are adjusting in tandem with these yield fluctuations, and the demand from multifamily borrowers for alternative lenders speaks volumes about the evolving dynamics of capital sourcing in this environment. As we move forward, well-positioned investors will find the opportunities amid the uncertainty—especially for acquiring discounted assets with strong future potential. It’s always fascinating to watch the intricate balance between risk, timing, and market conditions.