Clopton Capital's Take on Why Commercial Loan Rates will Rise while Benchmark Rates Remain Flat

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According to Clopton Capital, commercial loan rates will rise in the near future. This prediction is based on several fundamental truths that are confronting the commercial real estate market and this rise will take place while benchmark rates remain little changed.

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What is going to raise commercial loan rates is the loan industry itself.

The following is a prediction based on the opinions of Jake Clopton of Clopton Capital, a professional in the commercial financing industry about what is likely going to happen to the industry over the coming years based on current trends in finance and what you should do about it. Benchmark interest rates remain at historically low levels as they have since the Federal Reserve began their dovish rate campaign of quantitative easing and monetary policy. These rates are not perceived to change anytime in the near future, the economy remains at a sluggish level and inflation is seen as low and stable. Therefore to spur growth, the Fed has an incentive to keep rates at low levels and no reason to raise them. Because of this you would think that mortgage rates will remain stable, but this is not the case.

Right now the industry is beginning to see a small rise in commercial loan rates due to widening spreads against benchmark rates. Spreads widen for two reason, perceived risk and demand for capital. Ther is an increasing trend in both of these factors and it will only get more intense from here. Commercial loan risk comes from a fragile economy that seems to be at the mercy of every every word of news that hits daily. The system sees huge volatility in equity markets and real estate prices due to uncertainty and fear that seems to have no end. This makes our perceived risk of commercial loans high, so spreads widen.

Even more so than rising risk, there will be exponentially rising demand for capital. There is significantly less available capital in the world than there was five years ago, when a lot of the commercial loans that are coming up for refinance were written. To make matters worse, a large share of these mortgage are underwater, meaning they owe more than their underlying is worth. This places extreme pressure on lending institutions to release funds which will inherently make those funds more expensive. Money is a product just like any other and is you want to use it, you have to compete with others for the right, and pay for it.

In summation what is going to raise commercial loan rates is the loan industry itself, not underlying benchmarks. There is no reason for benchmark rates to move, only spreads. This will result in unprecedented bank and lender profits in a time when financial institutions are already coming under pressure for high profits. What business and real estate owners should do about this is to lock in rates at current levels by refinancing or moving on an acquisition more quickly. Making the move now to lock in interest rates at lower levels will help debt coverage ratios and save businesses.

Clopton Capital is a commercial real estate lending institution which provides nationwide commercial loans and commercial real estate loans. We have provided billions of dollars in commercial real estate financing. We handle every step of the financing process including; initial contact and advisory, document collection, capital markets proposals, negotiation, due diligence coordination, commitment negotiation, and closing.

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