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 | ||||||||
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 | 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 |
