Everything in the business world is of course a function of the simple principles of Supply and Demand. As demand goes up, so will the price. The same holds true with obtaining a mortgage. In addition to fluctuations in interest rates due to changes in the capital market, interest rates for mortgages will also go up if there are a lot of borrowers seeking loans, and vice versa, if loan demand is weak. While this factor may be somewhat less of an impact as compared to the Fed raising rates, it can still result in your interest rates going up an extra 50-100 basis points.
There are two main contributors to commercial real estate loan demand. The first is the result of new developments or as a result of acquisition financing. The second huge sector is the refinancing market. Eventually every loan will have to be either refinanced or paid off. Since a large portion of real estate financing is comprised of ten year maturity loans, you really have to look back at what was happening ten years ago to determine what the implications may be today. As in every interest rate cycle, as rates fall more and more people will refinance their loans. Additionally, when times are good and the real estate market is expanding more and more folks will seek loans. Those two things were in play back at the peak of the last boom market in 2006 and 2007. Forecasting ahead, that massive amount of loans are going to be coming due in a couple of short years from now. As a result, the demand for refinancing commercial mortgages is going to dramatically increase in 2016 and 2017. This in turn will put upward pressure on interest rates as lenders can charge more given the increased demand for their product.
The graph below shows the dramatic increase in loan maturities anticipated in the commercial mortgage backed securities (CMBS). According to veteran mortgage banker Ed Tamer of Grandbridge Real Estate Capital, “Years 2015-2017 will see the greatest amount of commercial debt maturities in the history of commercial debt in all asset classes. Lenders and mortgage loan investors will certainly have no problem meeting their annual loan quotas and will be more selective, looking at the ‘best of class’ “. With more product than dollars available, there will be significant upward pressure on interest rate spreads that the lenders can charge. Accordingly, if you have the ability, you may want to strongly consider any refinancing before this wave of loan demand starts to flood the market in mid-2015.
Tamer forecasts that by 2018, the pendulum may again swing back the other way with more money chasing fewer properties, thus resulting in lower interest rate spreads.
Of course, whether loan demand is heavy or light, there are plenty of other factors that will come into play in determining where your loan may be at, most importantly the general health of the economy and where interest rates are at the time. Needless to say today’s historically low interest rates are again fueling commercial real estate investments and the savvy investor will likely want to take advantage of today’s market.
Dougall McCorkle, MBA
Sales Associate and Commercial Specialist
Premier Commercial, Inc., Licensed Real Estate Brokers
Direct: 239.213.7234
Cell: 239.860.3368
dougall@premiermail.net