June 11, 2018
Variable rate loans have been a staple of the commercial real estate finance sector in recent years, as a result of low Libor. Now that Libor has been steadily increasing since early 2016, Real Capital Analytics’ asks the question, “Does that spell trouble for commercial real estate?”
RCA’s CRE economist Jim Costello points out that “If Libor goes up across various term lengths, there are two channels where the increases could cause trouble for commercial real estate finance, since rates on variable rate loans are often set as a spread to Libor.
That could make future loans more expensive. Costello notes, prior to 2016, most refinancing activity involved fixed rate loans over longer terms. As property prices climbed, investors turned to lower-cost variable rate loans to make deals pencil. Investments made in 2016 and later are going to face higher debt service costs when refinancing in the future.
Another area Costello notes to watch is a more complicated channel that involves the willingness of lenders to provide capital. If the TED spread grows, investors may become more fearful of credit instruments. That could cause lenders to become more hesitant to extend loans and tighten up the supply of credit to the commercial real estate markets.
Costello says, on the variable rate loan channel, so long as increases in Libor are moderately paced, lenders and investors can adjust their expectations on pricing without too much difficulty.
For comments, questions or concerns, please contact Dennis Kaiser