Why the Window of Opportunity Is Open for Borrowers

Now is the time for investors to maximize the spread between debt financing and returns, says Calkain Cos.' Jonathan Hipp.
Jonathan W. Hipp. Photo courtesy of Calkain Cos. 

We all expect investment activity to pick up after the summer months, but are we seeing a bigger uptick than normal?  We think so. 

The market dynamics are set for a prime opportunity—and we’re seeing investors take full advantage of it. Rates are low, lower than most of us would have predicted at the beginning of the year. In the past three months, the 10-Year Treasury has fallen nearly 60 basis points, this week actually rising to 1.83 as of Monday, still well-below the 2.0 percent mark. This makes borrowing that much more accretive for buyers. Investors that have been on the sidelines appear to be getting back in the game.

By its very nature there is a built-in lag on the impact interest rates have on net lease deals primarily due to the sales process. A deal closing today may well have been put under LOI back in June, and may take another 30 days to be seen in public records (i.e. a visible comp). Lending on the other hand, reacts much more quickly, weekly, if not even daily. For those buyers looking to maximize the spread between borrowed funds and returns, the window of opportunity is now open. 

Opportune Time to Finance

We’re expecting to see quite a bit of activity in the last quarter of 2019.  Our in-house marketing team confirmed a significant peak in activity.  Property marketing materials are being downloaded more often, and in the past two weeks, we’ve received an increase in the number of offers received. This is often the case this time of year anyway, but what we are seeing is a step change from year’s past. With the economy remaining strong and in this current lending environment, it looks like everyone is getting in on the opportunity.

Another interesting aspect to this market environment is that we’re not seeing any fewer all-cash buyers. In the under $5 million market, the all-cash buyer still reigns supreme, but increasingly even here where the cap rates are often sub-6 percent, we are seeing a new crop of buyers appear. Historically, it’s not made a lot of economic sense to finance a sub-6 percent cap deal, but with interest-only loans and low interest rates, the dynamic has begun to shift.