Although 10-year Swaps and Treasury rates fell Friday after a softer-than-expected U.S. jobs report quelled market expectations that the Federal Reserve will imminently roll back its monetary stimulus, the Swap Index used to set CMBS loan rates broke the 3% mark on August 19; it has traded in a range of 2.95%-3.15% since, hitting the top of that range on September 5. The 10-year Treasury closed at 2.98% on that day, two ticks from 3%.
The unrelenting rise in loan rates is depressing CMBS borrowers as CMBS loan spreads are not declining in tandem with the increase in the Swap Index, leading to higher-than-expected rates on loans under application. Furthermore, borrowers considering a CMBS refinance to secure an attractive long-term fixed rate are backing away now that rates are in the 5.5-6.0% range. On purchase transactions, borrowers are recognizing that purchase cap rates no longer make sense with debt costs up 100 basis points and they are going back to sellers to renegotiate contract prices, delaying deals.
“We are still active in CMBS refinancings in which there is a large cash equity return to the borrower that helps absorb the higher rate, opportunistic refinances (i.e., discounted payoffs, or pay offs of debt acquired by a third party) and loans refinanced at maturity,” commented Michael D. Sneden, Executive Vice President of ValueXpress, “but the discretionary borrower looking for a rock-bottom rate is gone. That borrower is often opting for a community bank loan; those institutions are slow to adjust their loan rates to current market conditions, providing banks a current competitive advantage over CMBS in terms of rate.”