Treasury yield, eased pricing affect mortgages

The past month has been a good one for commercial mortgage rates for two reasons.

First because the yield on the U.S. Treasury has remained rela tively stable and, second, because lenders' pricing eased by 10 to 15 basis points (0.10 to 0.15 percentage points).

Currently, commercial mortgage rates are in the 6.50 percent to 7.125 percent range for five- and 10-year loans, according to the Barron's/John B. Levy & Co. National Mortgage Survey.

After continued turmoil in the corporate bond and stock markets, investors are running to the relative safety of U.S. Treasuries and commercial and multifamily real estate investment trusts and real estate loans (commercial mortage-backed securities, known as CMBS).

Safety and real estate investment are generally not found in the same sentence, but REIT and CMBS investors find the diversity of location and tenancy an enticing harbor in a heavy storm.

When the alternative investments are potential WorldComs or Enrons, the line of reasoning starts to make sense. The end result for commercial real estate borrowers is that rates are getting more attractive.

But despite the low rates, borrower's weren't motivated enough to spur loan production, which continues to range from quiet to dismal. Most institutions surveyed reported production lagging some 30 percent behind the pace necessary to meet their 2002 targets.

Locally, Regency Square Mall was recently refinanced and the mortgage is being sold as part of a Banc of America Commercial Mortgage Inc. CMBS offering that will close on May 23.

The $82 million loan is the largest loan bundled into the CMBS offering and carries a 10-year term with a 6.75 percent rate.

Two major rating agencies, Moody's and Standard & Poor's, summarize the loan and the property's attributes in their pre-sale reports.

Interestingly, while both agencies refer to the planned Stony Point Fashion Park as future competition, only Moody's report bothers to mention Short Pump Town Center.

In reference to Short Pump Town Center, Moody's indicates "delays due to utility and infrastructure permits have plagued this development for nearly two years, and the timing of its completion is still uncertain."

CMBS investors who are not familiar with the market and rely entirely on the pre-sale report to make decisions would be hard pressed to walk away with the facts.

They would have no understanding of the situation if they read only the Standard & Poor's report and a misunderstanding if they read the Moody's report.

(Taubman Centers Inc. owns both Regency Square mall in Henrico County and is building the Stony Point mall in South Richmond.

(Taubman has filed two lawsuits against the rival Short Pump project, which Short Pump developers claim is a way of delaying contruction of their shopping center.

(One lawsuit claims a financial plan that the Short Pump developers want to use is illegal. A second trial took place in April, and the judge on Friday ruled against Taubman. The company said it will appeal. The other lawsuit was dismissed recently in federal court.

(Plans had called for Short Pump to open in September 2002, but the opening date was pushed back to September 2003. The Stony Point mall also is slated to open in September 2003.)

On another front, Freddie Mac indicated a reduced appetite for CMBS and expects to invest 30 percent to 40 percent less this year than in 2001.

Freddie Mac had been a voracious gorilla in the market but only went after deals that had a high percentage of multifamily loans.

Given the company's diminished appetite, the difference between pricing for multifamily loans and pricing for office, retail and industrial loans should narrow.

Traditionally, multifamily loans have enjoyed "favorite product" status among lenders.