MARKET RATE WATCH

10 year treasury 8-1-08: 3.95%; 1 month ago 4.00%, 6 months ago, 3.67%; 1 year ago 4.77%
5 year treasury 8-1-08: 3.24%; 1 month ago 3.32%, 6 months ago, 2.84%; 1 year ago 4.60%

Wall Street is back on the skids. Spreads for the long term (10 years) securitized loans are back to well over 400 basis points. That would make a 10 year rate today a whopping 8%. Wells Fargo continues to be the only player offering a fixed rate non-recourse 75% loan. Their spread for 5 year money is currently 350 (up from 325 in mid July) which puts the 5 year fixed interest rate right around 6.75%. They have been getting more attention lately on their 3 year fixed rate which has a lower spread of about 320, which makes the 3 year fixed rate today around 6% or a little under. Wells minimum loan size is $3MM but they prefer at least $5MM. No hotels.

Life company spreads have edged up as their allocations have been invested and markets started deteriorating again. Interest rates are in the higher 5% to lower 6% range for the shorter term loans (2 to 6 years) and to the mid 6% range for 10 year deals. Maximum leverage continues to be about 70% (effectively). Many life companies continue to remain on the sidelines and have told me that they are looking at 2009. Many life companies want to stay above $3MM but we do have a few clients that will do the $1MM and $2MM deals. Longer terms are available as well (15 to 25 years).

Credit Tenant Lease Transactions continue to be relatively stable. Walgreen’s credit has remained at a spread of 250 (over the interpolated 16 year rate). That makes the interest rate in the higher 6% range for a 25 year fully amortizing deal. Higher leverage (75% to 85%) is achievable for non-investment grade tenant deals through a division of GE. But their interest rates have increased back to the higher 7% range or they will do shorter term deals in the low 7% range.

ANOTHER FALSE START FOR LENDING MARKETS

After steady improvement and a return to some level of normalcy, the economic woes and soaring gas prices plunged the lending markets into chaos yet again. Spreads for long term loans had been under the 300 basis point spread range for 75% loan to value deals, and in the lower 200 basis point spread range for the lower-leverage life company deals. Spreads for these loans have bumped up 50 to 75 basis points since mid June.
But this time around there was another victim and that was Commercial Banks. Interest rate spreads for fixed rate loans had been in the 250 basis point range. These soared to 300 and in some cases well over, as capital preservation for banks sharply reduced stock prices, requiring a higher return on equity. Many commercial banks have simply retreated and are not making any new loans today.
At some point cooler heads will prevail. The commercial real estate markets are showing some weakness with rising vacancies in many sectors. There have also been some increases in loan delinquencies for commercial real estate loans, but they are still at historically low numbers (well less than 1%). With limited commercial real estate development over the past several years, most markets are in the best supply/demand conditions they have been in for 20+ years. Certainly far better than the late 80’s/early 90’s, which is the last time the markets saw interest rates spreads this high.