Risk & Finance Survey: Grocery Anchors Worth Avg 35 Basis Points
In the commercial property finance ecosystem, the cost of money is tied to widely used benchmarks such as the federal funds rate. Ongoing rumblings from watchers of the Fed are that the cost of money — aka the Fed’s funds rate — are soon on their way up for the first time in nine years. Remarks from Fed Chair Janet Yellen leading into he December 15-16 Fed meeting seem to support the idea that a boost in rate is on its way.
Anticipation of a hike in the cost of money means that spread risk is coming to a commercial property near you. Spread risk is the risk of change in an interest rate that puts a lender or investor into less favorable terms than when the investment or loan was made. Spread in this sense usually means the difference in interest rate between that given by effectively nondefaulting securities such as US Treasuries and rates negotiated in the field – rates that govern financing and refinancing for properties in every sector of commercial real estate.
Checking Out Risk Pricing
A fascinating study in rate spread risk was undertaken by Integra Realty Resources, covered by Paul Bubny in GlobeSt. In “Where The Spread Risks Are,” we get a nice overview of the prices of risk, put into the context of various commercial property development types and loan-to-value ratios.
In the office sector, the widest average spreads can be found in single-tenant non-credit properties in three of the four LTV ranges. For the highest LTV category, 76% to 85%, that distinction falls to multi-tenant suburban properties, with spreads averaging 321 bps compared to 292 for single-tenant non-credit. Conversely, multi-tenant CBD office property loans were financed with lower spreads across all LTV ranges except on deals with an LTV of 76% to 85%.
For retail, IRR’s survey found that unanchored properties were financed with interest rate spreads averaging 35 bps higher than grocery-anchored properties during Q3. Financing of unanchored retail properties had a median interest rate spread of 264 bps during the quarter.