Every dark cloud may not have a silver lining, but the coronavirus scare, which has the world in its grip for the moment, might be silvery indeed.
Last week the popular SBA 504 mortgage, the one most often used in owner/user sale transactions, hit a record-low rate of just 2.93%. That mortgage carries a 25-year term and is fully amortized. We know of no one in the industry who predicted such a precipitous drop in rate. Just two months ago, the rate for the same loan was already at an historic low of 3.71%.
So, how did this happen and why did it happen so quickly. The answer is simple enough. Mortgage rates are benchmarked off the yield on the US 10-YearTreasury bond, which is considered worldwide as an essentially risk-free investment. Lenders generally add a spread, or risk premium, to the 10-Year yield to set their mortgage interest rates, and that yield has plummeted to just .5%, its lowest level (by a longshot) in US history.
The reason for the precipitous fall in the 10-Year yield is fear over the global economic impact of the response to the coronavirus. Money has drained out of equities due to market volatility and poured into the safety of US treasuries, driving their price up and their yield down in the process. Even the yield on the 30-Year US Treasury bond was under 1% as of Monday March 9th.
You may recall our posts on the Psychology of Decision Making, our theory that all decisions are made along a continuum that ranges from Offense to Neutral to Defense depending upon the level of certainty (or uncertainty) of investors at a given point in time. Stocks and commodities have been hit hardest recently because they tend to be more speculative and can be easily traded in an instant. Clearly stock investors are on defense at the moment. Real estate is less impacted by daily economic and political issues due to its low level of liquidity and long term strategy of those who invest in it. However, real estate is getting the benefit of market volatility via lower mortgage rates.
The direct impact of lower mortgage rates is reduced occupancy cost for owner users and price support for potential sellers. Much of the price appreciation we have experienced in the last 10 years is due to low mortgage rates. So, with rates going even lower than they already have been in recent years, buyers are emboldened to pay a premium to control property that comes with a fixed occupancy cost for up to 25 years. It is indeed a remarkable opportunity and tenants tired of annual rent increases and record-high lease rates, are motivated to become their own landlords and reap the benefits of ownership for themselves.
By way of example, the payment on a $2 million loan at 4.74% (the rate approximately 1 year ago) would be $11,391 per month. That same $2 million loan at today’s rate of 2.93% would have a payment of just $9,412 per month, a savings of $1,979 per month. That adds up to a savings of $593,654 over the life of the loan. Wow. No wonder the demand for free-standing industrial buildings remains at a record level and prices keep moving higher.
So, if you have had your eye on acquiring a building for your business, but have been hesitating because of the high price required to get in the game, the coronavirus could be your silver lining. To make that decision to buy is on the offensive side of the decision making continuum, but if you have confidence that your business will weather what many believe is a storm that will pass through soon, then buying now could be a savvy move.
Conversely, if you are an owner who has been on the fence regarding the disposition of your property, the current low-interest rate environment has the wind at your back. Buyer demand remains high and new price records are being set every month. Selling at a premium is pretty much a sure thing for the time being. Your biggest challenge may be having the intestinal fortitude to write those checks to Uncle Sam and Governor Newsome.
The good news there is that you can write those checks with just a sliver of the windfall profit you’ll realize if you sell. Or, you can defer your tax liability through and exchange, or spread it out over time via an installment sale. Give us a call if you’d like to learn more about your options. We are here to help.