Commercial mortgage rate spreads: Treasury rates fall as lenders gear up for an active year

Industry participants say the market is still feeling the impact of the past two years’ volatility.

The five- and 10-year US Treasury rates declined in December and into January as the commercial real estate market priced in the impact of the Federal Reserve’s less hawkish outlook for the coming year.

The 10-year Treasury rate was at 4.18 percent as this issue went to press in late January, compared with 3.87 percent a month before. The drop comes as more borrowers are facing maturities while liquidity remains scarce, says Miguel Jauregui, a managing director of capital markets at Sands Investment Group.

Jauregui, who joined Sands in November to head its newly formed debt and equity advisory team, believes the market is still feeling the impact of the past two years’ volatility.

“The market has faced the impact of inflation and interest rates increasing on top of the liquidity problems that have plagued community banks, and this has translated into clients who always had easy access to debt needing guidance to make things work,” Jauregui says.

“Cap rates in the market have slowly moved with interest rates, and it has made financing a much more sensitive subject. Sizing to debt service continued to be a hurdle, although the lower rates we have seen are helping to ease that. Sponsors are starting to realize that even though the leverage requests looks fine on a deal, if the debt service does not size up, the loan proceeds will be adjusted accordingly.”

The liquidity challenge facing sponsors stems in part from the drop in the number of active lenders. “This has moved lenders into remaining conservative even in a newly surfaced, more dovish outlook from the Federal Reserve. But now we’re on speed dial because there are a third fewer active lenders today than there were in 2021,” he says. “There is not a shortage of debt requests but a shortage of debt that is willing to be put out there.”

Bridge lending still popular

Jauregui is expecting to see a continued interest in short-term loans as the capital markets remain conservative and lenders tighten liquidity.

“We may also see investors remaining on the sidelines, waiting for a lower-rate environment,” he says. “The bridge lending space is definitely making up a larger share of my pipeline than it has in the past. However, the permanent lending space is coming back as rates have dropped and confidence in the soft landing scenario is playing out.”