Commercial real estate investors are looking at the difference between long-term interest rates and property yields and are seeing a sign the current market cycle is sputtering out.
That spread between rates and yields have reached their narrowest margin in more than a decade. For some market pros, that is enough to predict the real estate market is heading for a downturn, according to the Wall Street Journal.
Because investors often borrow in large amounts to buy commercial properties, higher borrowing costs means slimmer margins and less profit.
In the past, when the spread between costs and interest rates tighten, it is often followed by a decline in property prices.
The last time yields were this close to interest rates was in 2007, which preceded a 35 percent drop in commercial property prices nationwide because of the financial crisis.
In the third quarter of this year, the average rate borrowers paid on loans packaged into commercial mortgage-backed securities was 5.03 percent. That compares to the same period last year, when it was at 4.52 percent, the Journal reported.
Average yields, however, have remained the same during the same time period.
Some lenders are also stepping back from commercial real estate. Wells Fargo is one of them. The bank decreased its exposure to the sector to $110 billion this year, down more than 5 percent from two years ago. [WSJ] — Keith Larsen