James Real Estate RE Fin Terms Dnvr 2000 3rd Qtr Page 5
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Summer of 1998 when yields on U. S. Treasuries continued to drop, but investors for CMBS required
higher margins in response to investors uncertainty as to how real estate would be impacted by the
world's economic turmoil. Although long term commercial mortgage rates reached near historic lows in
the Summer of 1998, both reduced demand and concerns over commercial real estate investments
resulted in rapid increases in CMBS yields.
Conduit lenders were especially susceptible to interest rate margin squeezes as seen in the
summer and Fall of 1998, because of requirements to borrow and match funds. Loan interest rates from
conduits are generally locked in prior to the actual loan closing using the 10 year U. S. Treasury index,
with the loans sold in a securitized pool. If the margin over the U.S Treasury index is perceived by the
mortgage bond buyer to be too low the lender cannot sell the mortgage and yield a profit. When U.S.
Treasury rates continued to fall, yields of CMBS did not, with many lenders left with below market
yielding commercial loans. This phenomenon resulted in many conduit lenders either increasing interest
rate margins, halting new loan production and in some cases losses were so large that all new loan
origination ceased completely. Despite the failure of several conduit lenders along with more
conservative underwriting/pricing by conduits there was still a considerable amount of funding available
for viable commercial projects, but long term interest rates much lower than 8% were difficult to find.
Commercial rates increased through the first quarter of 2000 due to continued upward pressure on
treasury rates, but generally long term fixed interest rates for A and B quality projects were still available
at 8% to 9%, providing a relatively low cost of funds for commercial real estate investments. Margins
did stabilize in the first half of 2000, with a declining 10 year bond index easing some of the pressure on
margins.
The Barron's-John B. Levy and Company National Mortgage Survey published by National
Real Estate Investor provides more recent data. The prime mortgage rates shown in the table below are
for loans of $5 million and up that can be funded in 60-120 days. Origination fees range from zero to
one point with an amortization schedule of 25-30 years and calls averaging seven years. Recent prime
mortgage rates reported are as shown on the following page.
