(Mark your calendars: RealShare New York Oct. 12 in New York.)
NEW YORK CITY-Both loan-to-value ratios and debt yields declined between Q1 11 and Q2 11 in the most active US commercial real estate markets, according to data released Friday from Chandan Economics. The Q2 2011 CRE Loan Quality Report also indicates that the biggest decline was in loans secured by performing office properties in those markets.
In New York, Washington, DC and San Francisco, the office loan debt yield declined to 7.8% from 8.1% during the period studied in those markets’ CBDs. Nationally, the office loan debt yield fell to 9.7% from 9.8%. The debt yield on high-rise apartment building loans also declined.
“In effect, apartment and office borrowers are encumbered with more debt for every dollar of cash flow their properties produce, heightening downside risks should property values adjust or cash flow decline,” the report reads.
The findings reflect the sharp competition among investors seeking to pour money into core assets, in high-performing markets and a “rebound in prices for these assets.”
Citing the tightening of lending standards that occurred during the financial crisis and recession, Chandan Economics suggests that “it is reasonable to posit that current declines in DY simply reflect a normalization of underwriting terms.” Still, there is cause for concern, as the lower yields may reflect valuations that, due to low financing, may have outpaced property cash flow.
Dr. Sam Chandan, president and CEO of Chandan Economics, writes a blog for GlobeSt.com available here.
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