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.