Interest rates for real estate are impacted by various factors with the primary factors being the global bond market and the interest rates manipulated by the Federal Reserve. Another determinant factor that drives interest rates is the spread that lenders charge their customers. That spread is the rate differentials between what lenders borrow money at versus what they can charge the individual borrowers.
That spread is significantly influenced by the simple laws of supply and demand. When the market is ‘hot’ there is correspondingly a lot of loan demand, thus lenders can increase their spread. Conversely when it’s a softer market there is less demand for loans and (all other things being equal) the spread can tighten. A caveat here is that certain investment categories (like real estate) or sub-categories (like hotels or apartments) can have their loan spreads also shrink or expand if the risks associated with those sub-categories changes. An example would be a weaker office market would add risk to a lender so that lender will charge a higher interest rate (increased spread) to entice them to take on the added marketplace risk.
Before the “Great Recession” there was a proliferation of real estate loans made in the CMBS market.
CMBS is the abbreviation for Commercial Mortgage Backed Securities. Instead of your local lender or insurance company making your loan; your loan was fueled by Wall Street and bundled together and sold to bond market investors.
In 2005, there was approximately $179 billion CMBS loans issued. That lending vehicle drastically fell out of favor during and post recession. In 2008, CMBS loans only represented $12.1 billion of the market.
Since ten years or so have passed since that last flurry of CMBS loans were funded, right about now is when a great many of those CMBS loans are maturing. The second quarter of 2015 will be beginning of their big wave maturities going from $3 billion in Q1 to $10 billion in Q2, $12 billion in Q3 and Q4 and over $18 billion per quarter by 2017.
This swelling of maturities will undoubtedly translate into higher spreads and higher mortgage rates in the quarter and years ahead. Lenders will have ample loan demand and will be able to “cherry pick” deals.
One asks: what are the implications for the overall market? Banks will certainly be winners. Interest rates and cap rates, which generally move in relative tandem, will have upward pressure. Investors may wish to consider refinancing earlier than later. Sellers may wish to consider selling sooner than later. If nothing else real estate investors, both buyers and sellers, need to be aware of these larger trends.