Welcoming Q3 2010

It’s time to welcome the third quarter of 2010.  What does it portend and what have the first two quarters of 2010 revealed about our economic well being?

As of July 1st the following obtains.

Since January:

- The Dow is down 695.52, or 6.7 %

- The S&P is down 87.73, or 7.9%

- The Nasdaq is down 167.79, or 7.4%.

That’s not such good news.  How about the bond market, what’s happening there and what does that tell us?

-  The 10 Yr Treasury Yield is at 2.95% on the first day of Q3 2010.

That’s gotta be good news right?  Wrong!  When do T Yields get that low?  They get to that level when meaningful segments of the US and world economy are under severe stress and alternative investments are considered risky.  What’s an alternative investment?  Assets such as real estate.  Low Treasury Yields often signal low long term interest rates, but be careful what you wish for.  If rates get too low, as they are now, it is a sign of economic contagion.  It is a symptom of a disease infecting the capital markets and the economy.

Ironically, we welcomed the advent of Q2 2010 in April with the 10 Yr Treasury Yield rising through the 4.0% level.  Now it’s 100 basis points lower and yet that is not cause for celebration.

Treasury Yields were last in the range below 3.0% in late Q4 2008 and Q1 & 2 2009, in the shadow of the worldwide collapse of the capital markets.  That was the threshold of the worst economic crises experienced during the careers of anyone reading this.  It’s been 80 years since the world’s economies have faced challenges of greater magnitude than those we face today.

How About Some Good News?

There is good news, more in the nature of “green shoots”, obviously not full blown economic revival.

Commercial Real Estate (CRE) has generally been starved for debt capital.  In contrast, multi-family property continues to benefit from the largesse of the GSE’s (Fannie & Freddie).

It is fair to say that most of the big life companies are back in the game.  That’s the good news. But product criteria are still narrow, i.e., deals with NO hair, fully stabilized, nothing smaller than $10-$15M.  Bottom line: those institutions are chasing (are your ready for this?) institutional grade properties.

More good news is that rates are very aggressive, typically in the range of low 5% to mid-6%. Leverage is loosening up also.  Some will lend up to the low 70% range.  As one large life company guy said to me, “It’s back to the future”.  The competition for Prime deals is savage. They are all chasing the same limited number of qualifying Prime deals and like buyers doing the same, they are having to compromise cap rate objectives.  But also like buyers, they are dealing in a rarified range of product and it’s a product everyone wants.  It is this chase which seems to be giving rise to the observation that cap rates are falling.  That, plus the fact that cap rates are falling for multi-family.  The latter is thanks to the extraordinary financing available from the GSE’s.

Deals <$10M can find financing, but the rates are not as favorable as those noted above and there are fewer lenders active in that range.


Consider this about multi-family:

1.  Refi – HUD 223(f) is currently priced below 4.2%, 35yr fully amortizing.  However, it takes 6 months to get approval so it is not viable for acquisition financing.

2.  Fannie – today you could get a Fannie loan at 5.1% – 5.2%, 80% LTV.  Obviously, those low rates are symptomatic of a sick capital market and a desperate monetary policy.  At this time the 10 Yr T Yield is 2.95%.  It has been at that level before and every time it has been there, it has been the sign of a contagion.  In late 2008 early 2009, in the post crash shadow, the T Yield was that low.  Then again in 1998 with the post LTCM default and Russian bankruptcy it was in that range for a short period.   If the T Yield falls much lower, we will be in a virtual “non-market” because it is a sign of contagion, not health.


The CMBS market is showing nascent signs of revival.  But it will take awhile.  Maybe the God-awful low bond yields will drive investors to CMBS sooner rather than later.  But currently, CMBS is not a viable financing solution for the typical CRE property.

About the Author: Jack Harty is the President of Harty Capital | Commercial Mortgage and Asset Recovery Advisory Services.  Please click on the link to Harty Capital for more information.

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