First American's Xander Snyder says refinances have a tailwind that sales lack
The volatility in the 10-year Treasury yield, which has hampered deals in the residential lending space, is starting to show impacts for commercial deals as well.
Rate volatility has caused lenders to change pricing multiple times a day. On large commercial deals, the difference can be substantial. At the same time, a wave of properties still needs either extensions or reworks of existing loans.
While these factors do create some headwinds for the commercial space, they also create opportunities for commercial mortgage brokers. According to one economist, a broker is in a position of strength to help navigate the tricky current conditions.
Xander Snyder (pictured top), principal commercial real estate economist at First American, said the shifting backdrop favors brokers who stay close to lenders.
"From a business development perspective, something that I think mortgage brokers are arguably best positioned in the market right now is to have as clear a read as possible of what prevailing debt costs are, because interest rates are fluctuating so wildly right now," Snyder told Mortgage Professional America.
Pricing is hard to read
The 10-year Treasury yield reached 5.36% on Oct. 7, its highest level in 24 years. Treasuries trade daily, so rising yields quickly show up in quoted borrowing costs, although the impacts aren’t as immediately felt as they are in the residential lending space.
"And it takes time for those higher debt costs to impact the commercial market because you won't even really see it in the actual transaction cap rate data until some time passes, right?" Snyder said. "So there is a natural lag built into the commercial real estate market from higher rates, even due just in part to how long it takes these deals to close."
In the meantime, deals are moving forward on quotes that change daily. Snyder said the strain is already reaching clients.
"I spoke with a commercial borrower recently who said that they and other borrowers are just kind of struggling to figure out what the new pricing is," Snyder said. "And part of the result of that is you have gaps between lenders who haven't really quite caught up to higher benchmark interest rates. You have others that are offering much higher rates."
For brokers, the question is what to do with that confusion. Snyder sees a business development angle in it.
"But the takeaway for someone in the space right now who wants to maintain strong relationships with their clients is being able to pass this information along," Snyder said. "They can really be a strong conduit of pricing information right now because the market is changing so quickly. And right now, if you are tied into the lending market every day, you kind of have the first glimpse at where new pricing is heading. And that's really valuable to borrowers."
Refinances have the tailwind
Property sales are where a sustained rise in rates could have a negative impact. The effect has barely shown up in the data yet, Snyder said.
"It's possible that they fall, right? In October 2023, we saw 5% 5-year yields, and they immediately fell off," he said. "But if they remain higher, then it decreases the prices that buyers can afford to pay. It'll require more equity or lower prices from the sellers. So that could, in theory, open up a gap between seller and buyer price expectations."
Lenders weigh a property's income as well as the rate environment. Snyder said the pressure on that income is coming from more than one direction.
"Inflation impacts that," he said. "Material expenses impact that. The amount of cash flow a building's kicking off impacts the debt service that you're able to place."
About 17% of the $5.0 trillion in outstanding commercial mortgages, or $875 billion, were set to come due in 2026, according to an Mortgage Bankers Association survey released in February.
"I actually don't think that this will necessarily hold back refinance volume," Snyder said. "It might a little bit, but there are so many loans that are coming up either for maturity this year or next year or some sort of liquidity event."
Some loans written in 2021 and 2022 are reaching the end of five-year fixed-rate or interest-only periods, Snyder said. Those shifts will change cash flow at the buildings behind them soon.
"I think that there's a little bit more tailwind in the refinance market right now than in the sales market, even at the higher interest rates, because you can choose not to sell, but you can't choose for these contractually obligated dates to go away," Snyder said. "They're going to happen, and you need to make a decision."
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