Interest rates increased significantly following the November 8 presidential election. The yield on the benchmark 10-year U.S. Treasury increased from 1.88% on November 8 to 2.57% on December 20. More recently, the bond settled at 2.34% on April 11.
Overall cap rates rose slightly in Q1, as most underwriting measures were slightly more conservative. The average cap rate on closed loans tracked by CBRE Capital Markets increased to 6.22% in Q1, up 22 basis points (bps) from Q4.
Commercial mortgage market conditions remain favorable. However, there have been some changes in in pricing and availability by lender type. In particular, bank construction lending is the weakest segment.
Life companies remain active in the market with new 2017 lending allocations. Spreads have come down slightly in recent months and some lenders have eliminated interest rate floors.
Bank rates and spreads have not been materially affected by rising long-term rates, due to the floating rate nature of much of the banking business. Banks’ underwriting remains under pressure from regulators.
CMBS and agency lenders have been most affected by the interest rate increases, as they tend to grant loans at higher LTV ratios.
Mezzanine lenders remain active, providing gap equity on loan refinances.