Last Tuesday, the buzz about the .75% cut in the Fed’s rate (also called the prime) started. People got on the phone to their mortgage lenders asking if now the time to refinance their home loan is. As a result, there is a lot of information about what that rate cut means to residential loans. However, I’ve seen nothing about what the cut in the prime means to commercial loans, especially not in simple terms.
So, I asked Dan Conrad of Smith Craine Finance the question and he answered me very simply and concisely. Here is the answer.
The Fed’s cut doesn’t mean much to commercial loans because most commercial loans are fixed rate loans. The only people who may be affected are those with adjustable loans that are coming up for negotiation in the 6–12 months.
The thing is that when those loans come up for negotiation, many of these commercial borrowers will expect their rate to go down because of the “Feds” cut. In reality, there was actually a spike up in interest rates yesterday, so it does not follow that a cut in the prime causes interest rates to go down.
If you want to see a better correlation for interest rates, look to the bond market because mortgages are packaged together with other loans and sold on the secondary market which is the bond market. So, in very basic terms, the bond market determines the interest rate.
The next question is obvious, namely, What makes the bond market rates fluctuate? Simply, disasters. The more disasters there are, the lower mortgages should go.
Now, there is a distant relationship between the prime and the bond market. The bond market trails the prime typically by 6 months or more. That’s why commercial borrowers with a commercial loan coming up for negotiation within the next 6–12 months could feel a result of this cut in the prime.
What does this mean to an investor? The usual. When you find a deal that meets your objectives, work with a qualified investment real estate broker and buy it. Use the tools that a professional like me can provide to help insure that your next real estate investment is a good one.
The S.I.R.E. Report
February 2007
Provided by Sheryl A. Smith, CCIM, CEO of Smith Real Estate Services
The national view tells us that real estate remains a “darling” of investors. However, since real estate is a local business, here is a look at Sacramento specifically.
Sacramento Retail
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Street Retail had the highest average asking rent of $2.17psf/mo.
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Average Asking Sales Prices are flat as compared to Aug 2006, across all retail property types.
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About 51% of the listed retail properties are between 5,000-24,999 sf.
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14th lowest retail vacancy market (6.2%) in the USA in 2006.
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5th highest average retail rent ($2.13 psf/mo) in USA, across all property types.
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Net absorption in 2006 14,000sf
Average Asking Price by retail building size
5,000-9,999sf $265 psf (28.7% of available property listed)
10,000-24,999sf $222 psf (22% of available property listed)
25,000-49,999sf $199 psf (6.1% of available property listed)
Snapshot: Compared to last month, average rents are slightly up and asking prices are ever so slightly down. Even though there is about 5% more product listed, there is still only about 1.3msf listed. Now would be a great time to sell! Call me today for a free investment analysis of your property.
Sacramento Industrial
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Flex/R&D had the highest average asking rent of $0.93psf/mo.
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Average Asking Sales Prices have gone up about 4.6% since Aug 2006, across all industrial property types.
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About 60.5% of the listed industrial properties are between 5,000-24,999 sf.
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Net absorption in 2006 1,001,000sf
Average Asking Price by industrial building size
5,000-9,999sf $144 psf (26% of available property listed)
10,000-24,999sf $128 psf (34.5% of available property listed)
25,000-49,999sf $ 97 psf (9.4% of available property listed)
Snapshot: Compared to last month, average rents are down, asking prices up. There is about 5.8 msf of inventory listed, which is about 5% less than last month.
Sacramento Office
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Office buildings had the highest average asking rent of $1.82psf/mo.
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Average Asking Sales Prices have gone up about 1.5% since Aug 2006, across all office property types.
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About 70% of the listed office properties are between 0-9,999sf.
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Net absorption in 2006 804,000sf
Average Asking Price by office building size
0-5,000sf $356 psf (45.7% of available property listed)
5,000-9,999sf $287 psf (24.2% of available property listed)
10,000-24,999sf $247 psf (20.1% of available property listed)
Snapshot: Compared to last month, average rents and asking prices are flat. There is about 4.6msf of inventory listed, which is down about 4.7%.
Sacramento Multi-Family
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Du/Tri/Fourplexes had the highest average asking sales price of $188,238 per unit.
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Average Asking Sales Prices are flat as compared to Aug 2006 prices, across all multi-family property types.
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About 66% of the listed multi-family properties are between 1-9 units.
Average Asking Price by unit mix
>5 units $189,061 per unit (51.6% of available property listed)
5-9 units $113,434 per unit (14.4% of available property listed)
10-19 units $104,240 per unit (9.2% of available property listed)
Snapshot: Compared to last month, average asking prices and inventories are both significantly down. Lots of inventory on the market…about 4.3msf.
Western Region Average Cap Rate
Office 6.9%
Industrial 7.3%
Retail 6.4%
Multi Family 5.4%
The S.I.R.E. Report is published monthly with results from the previous month. Stay current on property in Sacramento. Sign up to receive my posts by automatic email each month.
Sources: Loopnet Local Insights & the NAR Commercial Real Estate Outlook Reports
