Banc of America put a capstone on the blitz of activity with a $2.16 billion CMBS offering that helped set a domestic record for such issuances in one month.
The resulting abundance of CMBS supply had many industry veterans predicting higher spreads would be needed to attract enough buyers.
Spreads actually tightened during the last month, strong evidence that commercial real estate continues to be white-hot. The yield on the 10-year U.S. Treasury spent most of the month of June hovering around 4 percent and helped rates slide lower. Commercial mortgage rates are now in the 5 percent to 5.25 percent for 5- and 10-year terms, respectively.
The minimal difference between long-term and short-term rates (also known as a flat yield curve) has created an interesting dilemma for those developers and borrowers that continue to ride floating-rate loans.
After the Federal Reserve's quarter-percent rate increase of two weeks ago, the prime rate went to 6.25 percent, a full 1 percent over fixed-rate, 10-year mortgages.
The dilemma for developers is the fight between two very strong instincts — the instinct to borrow at the cheapest rate possible and the instinct to maximize flexibility.
Judging by the record volume of fixed-rate loans sold as CMBSs in June, the first instinct is winning the battle.
Although most industry prognosticators have been proved wrong at least once in the past 12 months, they continue to dust themselves off and get back into the guessing game.
A good example is from a panel of 12 highly credible industry leaders pulled together for the Barron's/Levy Survey in January of this year. The panel's average estimate for the 10-year Treasury yield at the end June 2005 was 4.66 percent, a far shot from the 3.94 percent actual yield.
This month, another panel was formed to predict rates for the end of the year. On average, the 12 panelists forecast a year-end 10-year U.S. Treasury yield of 4.32 percent. The estimates ranged from a low of 3.85 percent by Ken Cohen of Lehman Brothers and Phil Evanski of Nomura Securities to a high of 4.75 percent by Scott Stelzer at Morgan Stanley.
