With interest rates up over 100 basis points since May 1, it may be time for a stress test aimed at assessing the sensitivity of your portfolio to recent and expected future rate increases. You can be sure your lender is already doing one.

The impact of higher interest rates on current debt coverage and loan-to-value ratios will determine any problems you may face when you need to refinance an existing loan.

As a starting point for your analysis, apply the following matrix of projected interest rates combined with a minimum debt coverage ratio of 1.25 to 1.0 and a maximum loan-to-value ratio of 75 percent to your projected net operating income.

Regardless of outcome, pass or fail, you have taken an important first step in preparing yourself to deal with future changes in interest rates.

12/31/13

12/31/14

12/31/15

12/31/16

12/31/17

12/31/18

12/31/19

LIBOR (1)

0.20%

0.25%

0.75%

1.75%

2.75%

3.75%

4.75%

Ten-year Treasury (2)

2.65%

3.14%

3.64%

4.14%

4.64%

5.14%

5.64%

Mortgage rate (3)

4.65%

5.14%

5.64%

6.14%

6.64%

7.14%

7.64%

Sources: (1) Bloomberg LP; (2) various investment banks research reports; (3) ten-year Treasury plus 200 basis points.

Monday’s Numbers

The Trepp survey for the period ended August 16 showed average spreads unchanged as everyone who can seems to be heading for the shore, the mountains, the wherever—i.e., anyplace but the capital markets, which seem directionless, waiting for Labor Day to start the sprint to year’s end.

Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points
(Ten-Year Commercial and Multifamily Mortgage Loans for Properties
with 50% to 59% Loan-to-Value Ratios)

12/31/09

12/31/10

12/31/11

12/31/12

7/19/13

7/26/13

8/2/13

8/16/13

Office

342

214

210

210

184

176

178

175

Retail

326

207

207

192

168

158

163

159

Multifamily

318

188

202

182

161

154

156

156

Industrial

333

201

205

191

168

161

162

162

Average spread

330

203

205

194

160

170

165

163

Ten-year Treasury

3.83%

3.29%

1.88%

1.64%

2.52%

2.50%

2.63%

2.84%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads, which was updated August 12, showed spreads coming in 10 +/- basis points during the survey period. 

Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of August 12, 2013)

Property

Maximum
 loan-to-value

Class A

Class B

Multifamily (agency)

75–80%

T +210

T +220

Multifamily (nonagency)

70–75%

T +220

T +225

Anchored retail

70–75%

T +225

T +240

Strip center

65–70%

T +245

T +260

Distribution/warehouse

65–70%

T +225

 T +240

R&D/flex/industrial

65–70%

T +240

T +260

Office

65–75%

T +215

T +235

Full-service hotel

55–65%

T +275

T +300

Debt service coverage ratio assumed to be greater than 1.35 to 1.

Year-to-Date Public Equity Capital Markets

DJIA (1): +14.55%
S&P 500 (2): +16.64%
NASDAQ (3): +21.14%
Russell 2000 (4): +22.24%
Morgan Stanley U.S. REIT (5): +0.03%

Sources: (1) Dow Jones Industrial Average; (2) Standard & Poor’s 500 Stock Index; (3) NASD Composite Index; (4) Small-capitalization segment of U.S. equity universe; (5) Morgan Stanley REIT Index.

U.S. Treasury Yields

12/31/11

12/31/12

8/25/13

3-month

0.01%

0.08%

0.03%

6-month

0.06%

0.12%

0.06%

2-year

0.24%

0.27%

0.40%

5-year

0.83%

0.76%

1.66%

7-year

1.35%

1.25%

2.27%

10-year

1.88%

1.86%

2.82%

                                                  

Key Rates (in Percentages)

 

Current

One year earlier

Federal funds rate

0.05

0.15

Federal Reserve target rate

0.25

0.25

Prime rate

3.25

3.25

U.S. unemployment rate

7.40

8.50

One-month LIBOR

0.18

0.24

Three-month LIBOR

0.26

0.43