Situs CRE Debt Market Update: Appetite for Apartments Remains

In its CRE Debt Market Update for 4Q 2017, Situs RERC reports that the 4Q 2017 lending environment was healthy and paints a rosy picture for lending in 2018. Investor appetite remains strong for commercial and apartment loans, which has driven mortgage rates down; and, loan-to-value (LTV) ratios remain modest compared to pre-recession levels, indicating less risk for lenders.

“The apartment sector has been the darling of the recovery, and we expect continued investor demand for the sector in 2018,” says Jennifer Rasmussen, Assistant Vice President of Situs RERC. “Declining vacancy rates and stable rents for apartments is predicted to continue in 2018, which is good news for lenders who may be skittish that the current CRE cycle has become long in the tooth.”

Analyzing debt metrics provided by Real Capital Analytics (RCA), Situs RERC finds:

  • The quarterly average 10-year Treasury rate increased from 2.24% in 3Q 2017 to 2.37% in 4Q 2017, yet commercial and apartment mortgage rates were generally flat during the same period as an influx of capital inflows for creditworthy borrowers offset the rate hike.
  • Year-over-year (YOY) commercial and apartment mortgage rates were mixed, with rates decreasing 10 bps for commercial and increasing roughly 10 bps for apartments.
  • Investor demand for loans backed by apartment properties rose in 4Q 2017 due to solid fundamentals and a stabilization of new construction activity.

  • Commercial LTV ratios decreased to 61%, roughly 3 percentage points YOY.
  • Apartment LTV ratios decreased to 67%, roughly 1.5 percentage points YOY.
  • Despite decreasing this quarter, apartment LTV ratios were near their post-recession high of 69% in November 2017.
  • There has been a general downward trend in CRE and apartment LTVs since early 2016.
  • Lenders have taken a more risk-off approach due to concerns that the CRE market has reached its peak.

To learn more about Situs RERC research, visit our website or call 319-352-1500.

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