Q3 Results & State of the Market
Thursday, October 18, 2018
While rates are still very attractive from a historical prospective, we are finally beginning to see the effects of rising interest rates. In 2018 alone, the Federal reserve has raised interest rates 0.75%, and anticipates another 0.25% increase in December. The Fed has also indicated that “several” 0.25% increases are expected in 2019. To put this in perspective, all-in interest rates for manufactured home communities have increased from the 4.25-5% range at the beginning of 2018, to 4.75-5.5% (depending on deal size, quality, economic performance). Unless loan margins start tightening, we can anticipate that borrowing costs end up in the 5.25-6% range in 2019.
In spite of rising interest rates, borrowers have a wider range of lending options than ever before. Fannie Mae, Freddie Mac, and CMBS have all been very active in providing loans to the industry and are actively competing with each other. Today, lenders are offering fixed interest rates for terms of 10 years up to 30 years, and extended interest-only periods up to 10 years.
Today’s market is still full of buyers with billions in capital raised and ready to be deployed. Occupancy rates are strong, community home sales are robust and with strong employment, owners have been able to increase rents steadily. The most important question is: how long will values sustain their record-high levels with investors taking record-low rates of return in a rising interest rate environment? Interest rates and cap rates/values have historically had an inversely correlated relationship. This may be the last window of opportunity to take advantage of top dollar valuations.
At Yale Realty & Capital Advisors, we’re committed to helping the communities and people devastated by Hurricane Michael.
We’re supporting organizations including The American Redcross, for cleanup and recovery efforts, and All Hands and Hearts Smart Response, for rebuilding disaster resilient communities.
We encourage our clients to take action by making a contribution, however big or small. Together, we can help rebuild strong communities and assist with relief for the impacted areas to ensure they’re safe and victims are receiving the help they need. Our thoughts and prayers are with the families and victims that have been directly impacted by Hurricane Michael.