Commercial Mortgage Rates Dip

Fixed commercial mortgage rates dipped as a result of lower 10 year treasuries. The 10 year treasury rate fell in June to 4.88%. Ten year treasuries have been above 5.00% since 1967 except for a period in 1998 and again briefly during 2001. For the past 18 months, they have hovered around 5.00%.

Commercial mortgage rates are directly and indirectly tied to this benchmark. Typically spreads (differences) above the same length treasuries are 1.30% to 3.50% higher depending on the quality of the deal. The best rated deals will have mortgage rates of 1.30% to 2.00% above treasuries, so deals in this category will have mortgage rates of 6.18% to 6.88%.

[Table of Commerical Mortgage Rates(%)
C Rated Mortgages=8.25% --
B Rated Mortgages=7.50% --
A Rated Mortgages=6.50% --
10 Year FHLB Rates =5.60% --
10 Years US Treasuries= 4.88% --]

On the low end of the quality scale, mortgages on lower rated properties are often based on Federal Home Loan Board (FHLB) rates plus 2.00% to 3.00% spreads. Currently, 10 year FHLB rates are 5.60%, so mortgage rates for lower quality properties will run 7.60% to 8.60%.

For those who don’t think rates are going up soon, they may want to take advantage of an extremely low prime rate of 4.75%. Often floating rate mortgage loans are tied to this index plus a 1.50% to 2.50% spread. So floating rate loans will be cheaper than fixed rate loans if all else is equal.

Steve
Stephen Traub, ASA
Publisher, PVM ^SM

The author, Stephen Traub, ASA, is Chief Commercial Appraiser for Property Valuation Advisors, Newburyport, MA. He is a certified general appraiser in NH, ME and MA. He can be reached at 978-462-4347 or:
by e-mail: straub@shore.net