Future of Commercial Mortgage Rates

The Future of Commercial Mortgage Rates

Low current commercial mortgage interest rates, slowly improving property values and increasing investor demand have spurred a flurry of activity in a sector that’s been quiet for years. But what do higher loan-to-value ratios and loosening borrowing standards mean for commercial lending rates?

Frothy or Healthy?

The Wall Street Journal reported in November of last year that borrowers, anxious to secure property loans in a low-interest-rate environment, completed approximately $46 billion in commercial mortgage bonds in 2012. In 2013, the WSJ anticipates that number to increase to $65 billion. And as if that increase weren’t astonishing enough, mezzanine financing, which the Journal reports was even harder to come by than commercial mortgage financing, is growing as well.

Established businesses with less-than-ideal credit are finding lenders saying “yes” when as recently as a year ago a firm “no” would have been assured. But with Treasury Secretary Benjamin Bernanke’s stated intent to keep interest rates at or near zero, lenders are struggling to assure yield.

Although the credit watchdogs at Moody’s worry loosening lending guidelines may put businesses — and the economy — in jeopardy once again, the coming year is unlikely to see either a significant boost in rates or a clampdown on lending.

What it Means

Well-qualified commercial borrowers with excellent credit and adequate collateral are likely to enjoy a favorable lending environment for the near- to mid-term of 12 months or possibly longer. Not-as-well-qualified borrowers won’t enjoy the historically low rates that their healthier counterparts do; however, as lending standards loosen over the course of the next several months, they may find more options exist.

These borrowers, once shut out of the lending market entirely, will find increased competition for their business, resulting in dropping rates for the less-qualified buyer over time. The combination of an expanded pool of eligible borrowers with high property inventory and the potential opportunity to refinance to a still-low rate down the road mean one can expect to see higher real estate prices and reduced rates for riskier borrowers overall.

And the Treasury? One cannot imagine higher interest rates until real estate and employment are back on well-established paths of growth.