The Real Estate Capital Institute®

Mortgage Funds Gravitate to Office Buildings

Long ignored, Sector Captures Lender Attention


Chicago, Illinois -- (ReleaseWire) -- 09/08/2006 --While residential housing markets throughout the country are pausing, commercial real estate activity remains brisk. In particular, office properties are re-emerging as a financing product of choice.

The office market sector has been in doldrums for quite some time -- most of this decade. As the economy is improving and new office supply is virtually nonexistent, office buildings are enjoying attractive rental growth rates and increased occupancy.

And even though interest rates continue rising, capitalization rates remain low for office buildings. Owners and buyers strongly believe in rental growth, placing a pricing premium on upside potential.

More importantly, the real estate capital markets are recognizing the office market sector. Pricing premiums are dramatically compressed as compared to other desirable property types (e.g. apartments and retail). Low-leverage and/or larger "trophy" properties capture mortgage rates below 100 basis points over comparable-term treasuries. Conventional-leverage properties (e.g. 75 to 80% loan-to-value) find pricing within the 100 to 140 basis-point range. Repositioning and rehab loans are priced in excess of 150 basis points.

Given the behavior of the yield curve, the 10-year mortgage term is the most attractive funding timetable. Five and seven year terms, or less, are trading with premiums of as much as 15 to 20 basis points. Since the yield curve is inverted, borrowers should continue to opt for longer terms.

Nat Zvislo, research director for the Real Estate Capital Institute, believes that "office buildings, in particular, have extremely attractive long-term rates, especially by historic standards." Adding, "Any time you can get financing within the low-6%-range, you have favorable debt."

For more information about the Real Estate Capital Institute, please visit For more information on historic rates, various charts and tables are available dating back to 1990 at For hourly interest rate updates throughout each trading day, call 773-227-4825 (The Real Estate Capital Rateline).