The Real Estate Capital Institute®

Mortgage Markets in Turmoil - Have We Hit Bottom?


Chicago, IL -- (ReleaseWire) -- 11/21/2008 -- The expanding financial crisis hitting global markets as a result of domestic housing continues to torpedo the income-property mortgage market. Lenders and borrowers alike are frantically seeking answers to questions about where markets are heading including pricing, values and acceptable leverage levels.

People have more questions than answers including the following:

• How long will the housing crisis last?
• How much leverage is acceptable?
• Will securitized mortgage markets return?

Regardless of these questions and many other concerns facing the industry, bricks-and-mortar are physically and economically here to stay. Food and shelter are basic necessities with the real estate industry providing shelter for businesses, manufacturing and housing for the general population. Fundamentally real estate is a sound investment and will rebound in tandem with many other sectors of the economy.

The cause for panic is not necessary as repricing to more historically “reasonable” levels sets the stage for tremendous investment opportunities for investors knowing how to use limited leverage and assuming acceptable risks with the following trends emerging relating to yields and pricing:

• Capitalization rates rising by 100 to 150 basis points over from a year ago, translating to a pricing corrections of 10% to nearly 25% or more, depending upon specific submarkets and property types.
• Leverage levels will remain at 65% for permanent debt until lenders see more stability in the equity markets.
• Return-on-cost metrics demonstrate that investors need to see premiums of 150 basis points or more for new developments over and above existing capitalization rates because of attractive alternative investments. Return-on-cost will creep into double digits figures on a more regular basis, as a result.
• Overall "baseline yields" using relative value mortgage bonds are hovering above 7%, indicating a new floor for profitable lending.
• Equity yields for opportunistic properties will need to reflect 20% or more for short-term investments as substantially more attractive investment opportunities abound in the stock market.
• New-construction opportunities limited to all but the most carefully chosen and risk-free projects such as GSA built office buildings, for instance.
• Project downsizing and repositioning continues as condominium projects are reconverted to rentals. Vacant office buildings as well as retail facilities are in some cases changing to alternative uses such as industrial and multifamily projects.
• "Hesitation investing" prevails as buyers use time as an effective negotiating weapon for catching better terms and conditions.

In conclusion, whether or not the markets have been repriced to reflect current realities, opportunities should continue emerging as many investors look to liquefy their portfolios to maintain defensive ownership strategies in light of a cash-strapped economy.