Average market credit spreads — Q1 2024

Fixed-rate loans (<50.00% LTV)

Fixed-rate loans (50–60.00% LTV)

Fixed-rate loans (60–75.00% LTV)

Floating-rate loans

An important note on office spreads

The office spreads published in the Q1 2024 Credit Spread Report were lower than expected. We wanted to provide context around the key drivers that affected office spreads this quarter.

Chatham utilized a “same store sales” methodology for this report, which requires a loan to receive a fair value in both the current and previous quarter. The loan also must be within the same LTV range indicated in the report in both quarters. In recent quarters, nearly all office values declined, which often moved the LTVs from one range used in this report to a higher range, and thus, precluded them from the data set.

Additionally, as trouble in the office sector worsened, office loan valuation techniques have shifted from using a market rate/spread to placing greater weight on a distressed sale analysis. This circumstance has removed riskier office loans from our data set, which further skews the “average” lower.

Set forth below is credit spread guidance for loans on office properties in the first quarter.

• For medical office properties, most loans we saw originated in the 250–350 basis-point-spread range (mostly floating-rate, but a few fixed-rate). Loan-to-value ratios for these loans typically maxed out at 60–65%. Loans on riskier medical office or loans being stabilized would be expected to be priced in the 400–500 basis-point range.
• For traditional office properties, the best quality assets with long-term WALT and staggered lease terms — or single tenant buildings with A-rated tenants — were originated in the 250–350 basis-point-spread range. We would expect the spread for an average traditional office to be priced in the 350–500 basis-point-spread range with more troubled assets being priced even higher.

The best use of this report is to observe the change in spread from the previous quarter rather than the absolute level of the average spread. For those who use the data in this report to inform valuation conclusions, it would be prudent to adjust the change in spread based on factors and nuances specific to your subject property and loan.

Base rates

Underlying data

Chatham Financial provides independent debt valuation services for a variety of commercial real estate entities including open end and closed end private equity funds, separate accounts, private REITs, debt funds, public REITs, and private equity fund daily priced investment vehicles. The information in this report represents averages of market rate and spread conclusions on 2,160 loans. The loan population used for this analysis was limited to loans valued in both Q4 2023 and Q1 2024 with a current date of value as of March 29, 2024, and for real estate investments located in the United States.

Market rate technology

For the purpose of measuring the fair value of debt, the market rate conclusions represent the most likely lending rate for each individual loan given capital markets and property performance as of the date of value. Considerations in developing a market rate conclusion include property type, location, loan to value ratio, property performance, debt service coverage, and term. Capital market conditions are determined through an observation of recent and applicable loan originations as well as interviews with lenders, capital markets teams, and other market participants.

Spread calculations

The spreads referenced in this report are calculated by subtracting the trailing 10-day average origination term base rate from the market rate conclusion for each loan. For instance, if the market rate conclusion for a 10-year loan is 3.50% and the trailing 10-day average 10-year Treasury yield is 1.00%, the implied spread used for this analysis is 2.50%. The average of these spreads are then aggregated by property type and LTV for reporting purposes.

Loan specific considerations

This report is intended to be a reference and guide for general trends in commercial real estate lending markets. Adjustments to the reported spreads are likely necessary for the purpose of marking debt to market to account for loan and property specifics including nuances such as embedded floors, open prepayment periods, the remaining term of the loan, lender type, and individual property performance.

Additional resources

Resources on debt and capital markets, as well as debt valuation best practices and white papers, can be found on our insights. To learn more about our independent debt valuation practice or to speak to a valuation professional, please contact Chatham’s Valuation team at [email protected].