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Treasury Market Volatility and CRE Opportunities

Treasury Market Volatility


Treasury volatility in the U.S. has caught on fire in 2019. The U.S. 10-year Treasury dropped as low as 1.477% on August 15th and slipped past the lowest level that we have seen since October 2016. Earlier in the morning on August 15th, the 30-year Treasury bond fell below 2.00% (1.943%) for the first time ever. To add to the drama of August, on the 14th, the yield on the 10-year Treasury inverted with the 2-year Treasury which has preceded every single recession in U.S. history. Most mainstream economists agree that Treasury volatility is not going to subside in the near future, so where does that leave us moving forward?

As noted in Table 1, 2019 has seen major events relating to the U.S. treasury “yield curve”. The Treasury yield curve (3-month T-bill vs 10-year Treasury) inverted on March 22nd, 2019, and since that day, we have seen continued volatility in the Treasury market. Before we dive into the implications of continued Treasury volatility on the commercial real estate market, let’s review as to why, and how, the Treasury market is priced.

Table 1.

Market Variables


The Treasury marketplace is best described as a bid-auction process with the main goal of providing institutions and governments around the world the opportunity to obtain “risk-free” interest. This interaction between institutions and governments is dictated by geopolitical events (i.e. China, Brexit, Tariffs, Trade, Iran), global central banks (i.e. $15 trillion in negative-yielding bonds including Germany, France, Switzerland, Netherlands, and Japan), the U.S. Federal Reserve, inflation expectations, global fiscal policy, and @RealDonaldTrump’s Twitter account. Currently, we are in a point in the market cycle in which most of the factors mentioned above are experiencing heightened uncertainty in addition to a plethora of weakening global economic data. To the contrary, the U.S. continues to see record employment, low inflation, better than expected consumer spending and consumer confidence, better than expected corporate earnings, and a high probability of future rate cuts by our Federal Reserve. 

Implications and Opportunities for CRE


At this point, it seems as though all of the wires are crossed. Volatility continues to be a result of investor fears in the global marketplace. So what does this mean for commercial real estate? Well, if you are holding onto floating-rate debt, you may see some relief in your debt service payments as well as an increase in your net cash flow. Additionally, if you are an individual who is seeking fixed-rate debt; it is a very favorable time to take advantage of the low-interest rates and low floor rates that are being offered in the marketplace today.

In conclusion, we are in uncharted territory when it comes to our Treasury market. What we do know, for now, is that the Fed will continue to be accommodative and believes that an increase in the economic stimulus (lowering of Fed Funds Rates) can extend the current duration of our market expansion. This means that the cost of capital and the cost of borrowing will be in historically favorable conditions for those individuals looking to acquire or refinance existing debt. As of now, the spread between market cap rates and long-term Treasuries are in a healthy range. Historically, this suggests that the commercial real estate market is still in a stable and healthy position for the near-term. Reach out to one of the Q10 | KDH mortgage banking professionals to talk more about how you can make the most of today’s interest rate environment.

Notable Current Events


  • The U.S. 30-year Treasury yield falls below 2% for the first time (Aug 15th)
  • The U.S. 10-year minus the 2-year yield has inverted for the first time since August 2007
  • Japan surpasses China as the largest foreign debt holder reaching $1.123 trillion with China standing around $1.113 trillion
  • 10-year Treasury has dropped approximately 115 basis points from its January 18th high of 2.79%

2019 Aggie Real Estate Network Conference Recap

Q10 KDH Vice President David Holland, President-Elect of the Aggie Real Estate Network (AREN), helped plan and organize the recent 2019 Annual AREN Conference at the Marriott Marquis in downtown Houston. In addition to seminars and speakers, the conference activities included a happy hour, dinner, golf tournament, and Astros vs. Rangers baseball game. Q10 KDH is proud to be a sponsor of the annual AREN Conference.

Keith Read, Q10 KDH Associate, compiled the following notes from the speakers’ presentations and panel discussions at the conference.

Will McIntosh, Ph.D – Global Head of Research – USAA Real Estate Company

Overview: Expects to move into a recession in 2020 with 10-15% value corrections. Last 7 times we had a yield-curve inversion we had a recession 5-17 months later. Global slowdown, tariffs, tax cut burn-off, and slowing consumer spending are all indicators.

Interest Rates: Expects that rates will continue trend downward and the Fed Funds Rate could end up at 1.75 over the next year. Currently $295 billion in dry powder for CRE with global capital chasing US CRE and gov-backed investments– thus keeping the treasures low.

RE Market: Supply is very high as well as demand in gateway and growth markets, vacancy is up but not above historical averages in most major markets. Taking defensive stance. All-time highs in transaction volumes and price levels across many major markets with industrial and multifamily leading the way.

Returns: Core RE returns stabilizing and moderating in all major food groups except industrial. NCREIF has a 6.72% total return on CRE vs 8%-9% historical average.

Institutional: Investmentcontinues to move down the risk-curve toward value-add and opportunistic. Institutions are forecasting core returns to drop around 5%.

Demographics/Jobs: Slowing employment growth from 200,000/mth to 165,000/mth, believes unemployment has bottomed out.

Cap Rates: Historically are 234bps over treasuries and are close to “overpriced”. Evidence that they are moving upward.

Investment Stance: Focusing on industrial logistics, multifamily, government office, grocery anchored, debt platforms, and underutilized malls in A locations.

Development/Investment Panel:
Wally Reid (JLL), Peter Barnhart (Caldwell Companies), Jonathan Brinsden (Midway Companies), Jacob Milligan (Prologis), and Aaron Sherman (Stillwater Capital)

Cost: Cost is outpacing rent growth, labor markets continue to strain feasibility, and developers are showing 5% cost increases every 6-9 months.

Trends: Mixed use is difficult to off-load with only 3+ major institutional buyers in market. Very difficult to have comps for mixed-use.

Strategy: Office is becoming hospitality – some “renting by the desk” becoming more popular for flexibility. Institutional tenants moving into the co-working space to attract talent and gain flexibility. Studies showing that 15-20% is seen as most efficient allocation of co-working leasable area.

HFF/JLL: Began tracking high net-worth families looking for cash yield. Trying harder to tap into this market.

David Ellis, Ph.D – Texas A&M Transportation Institute

Overview: Lowering the demand curve is the “3rd generation of transportation”. There are many more opportunities to NOT make a trip while accomplishing the same task or purpose (think blockbuster). There is major trend in all age cohorts, except for 70+ year olds, demonstrating less people with driver’s licenses. The number of 16 year olds with licenses has been cut in half from 1983-2014. Telecommuting is up 115% since 2005 and carpooling is down -5%.

Capital Markets Panel:
Chad Owens (Northmarq Capital), Lynn Carr (Wells Fargo), Jimmy Caple (Argentic), Catherine Justice (Freddie Mac), Chris Suttle (USAA Real Estate)

LIBOR: General consensus is that SOFR will replace LIBOR. Most are adding general language to docs so that the transferring process is easier in the near future. Most are working on ‘triggers’ in loan docs for the replacement metric. 

Trends: More borrowers wanting fixed rate debt. Freddie Mac went from 50/50 fixed/floating in 2017 to 76/24 in 2018/2019. Debt funds becoming more competitive and are able to utilize clo market for leverage.  

Closed: Acquisition Loan for Medical Office in Georgia

Q10 KDH Vice President Matt Franke and Associate Michael Borden arranged debt for the acquisition of a single-tenant medical office near Atlanta, GA. The property featured over 8,000 SF of leasable space and was built in 2018. 

“KDH was pleased to provide acquisition financing for a New York-based family partnership which facilitated their purchase of a newly constructed Class A medical office building,” Matt said. “The borrower was seeking traditional life insurance company underwriting, which in this case included a 10-year, fixed-rate of approximately 4.60% and a 25-year amortization.  We selected Symetra, which is a correspondent lender for KDH, due to their competitive interest rate and low closing costs.”

Q10 KDH Closes Permanent Debt Loan for Industrial Park in Houston Suburb

Q10 KDH Vice President Larry Peters and Senior Associate Adam Unger arranged permanent debt for a 42,000 SF industrial park in Katy, TX. Larry and Adam worked on behalf of the borrow to secure a 10-year, fixed-rate loan. The 100% leased property was built in 2017.

“With the increasing costs of construction, developers are finding it difficult to pay off construction debt and pull equity out of a transaction,” Larry said. “We secured a loan that was able to pay off the construction lender at stabilization and put some of the borrower’s equity back in their pocket. The quality of construction, strength of the rent roll, and strong market fundamentals helped solidify the deal. Our repeat borrower saw the value of working with an experienced KDH debt team who negotiated a 10-year-term loan with limited recourse and no prepayment penalty.”

Closed: Single-Tenant Retail Property in DFW


Q10 KDH Vice President Travis Fite arranged a $4 million loan for the acquisition of a 55,000-square foot, single-tenant retail property in Allen, TX. Travis worked on behalf of the borrower to obtain a ten-year, fixed-rate loan with correspondent life insurance company, StanCorp Mortgage Investors. 

“We were able to secure a ten-year, fixed-rate loan for the buyer of a single tenant gym property in Allen, Texas,” Travis said. “Our correspondent lender, StanCorp was able to get comfortable with the gym tenant based upon a large number of members at this location, not to mention a positive history with this repeat borrower.”

$2.35M Loan for Metro Atlanta Retail Acquisition Closed After Multiple Financing Offers

The six-tenant shopping center located in the northern suburbs of Atlanta, GA, was constructed in 2006.

Q10 KDH Vice President Matt Franke arranged $2.35M in debt for the acquisition of a Starbucks-anchored shopping center in metro Atlanta, GA. The Class A retail property featured over 8,300 SF of leasable space and was built in 2006. Matt secured a 5-year loan with a national bank lender.

“Through a referral from an existing client, we were engaged by our New Jersey-based borrower to provide acquisition financing for this Class A Starbucks-anchored retail center in suburban Atlanta,” Matt said. “As part of their estate planning, the borrower required non-recourse financing with prepayment flexibility. These requirements were met by our national bank lender who also provided a 30-year amortization and total lender closing costs of less than $10K, including the appraisal, Phase I and lender legal. We received multiple financing offers for this high quality property, with many interested lenders attracted to the recently renewed Starbucks lease and the strong neighborhood demographics.”

Closed: $9.5M for Acquisition of Industrial/Manufacturing Facility

The 145K SF property is centrally located for the tenant’s customers in San Antonio, Austin, and West Texas, as well as the Houston headquarters.

Q10 KDH Vice President Matt Franke and Associate Michael Borden arranged acquisition financing for a 145,000-square foot industrial/manufacturing property located in Columbus, TX. Matt worked on behalf of the borrower to obtain a 20-year loan from a regional portfolio lender. The 15-acre property included multiple manufacturing and distribution buildings and a separate 7,400 square foot office.

“We were able to obtain financing for this sale-leaseback transaction for our repeat borrower, despite the subject’s tertiary location in Columbus, TX,” Matt said. “The property is ideally positioned for the tenant at a central location, allowing access to their San Antonio, Austin and West Texas customers, while also benefiting from its proximity to their Houston headquarters. For our borrower, non-recourse fixed-rate financing was their primary objective, and we were able to leverage an existing bank relationship to provide the needed financing.  In a rising interest environment, the fixed-rate loan locks in the borrower’s returns during their projected hold period.”

Relationships seal the deal for west Houston warehouse

The team of Larry Peters and Adam Unger of Q10 KDH had a busy 2018, with 2019 off to a similar start and expected to be a solid year as well. Various property types and numerous capital sources were accessed using Q10KDH’s national platform and long-term lender relationships.

The transaction below highlights one of the more challenging requests of 2018 when considering the cumulative borrower demands, but an example of KDH’s ability.

The 75,000 SF warehouse is located on over 15 acres of land in west Houston.


Team closes $5M user industrial acquisition loan  
Unique transaction needs met with help from Q10 KDH 

Q10 KDH Vice President Larry Peters and Senior Associate Adam Unger arranged $5 million for the acquisition of a 75,000 SF industrial property in west Houston. The Class A warehouse includes 2,000 SF of office space. Peters and Unger worked on behalf of the borrower to identify a capital source that could meet all of the borrower’s requirements. The transaction closed with a ten-year term, fixed rate loan with a regional bank.

“Traditionally our firm is thought of as a life company correspondent when investor real estate is desired to be financed,” Peters said. “What made this situation a challenge was the combined demands of the borrower. First, the owner was a user and entity, with no individual as the sponsor. A high percentage of the purchase price (85%) was requested along with a long-term loan (10 years), a fixed rate, no guarantee of the debt, and with no lender fee.”

Q10 KDH is a founding member of Q10 Capital, LLC. In 2018, the Q10 Capital members cumulatively closed loans with 113 different capital sources.

“Our knowledge of working with numerous national and local debt sources proved to be the difference of successfully meeting all sponsor needs or just a few. A debt source was secured who saw past the typical underwriting ratios and lending parameters. They understood the value of starting a relationship with the borrower and continuing a relationship with KDH,” Peters said.

The borrower was referred to Peters through a mutual client who has also worked with Q10 KDH on past transactions. Peters said that he considers referrals to be the greatest honor and a mark of trust, both professionally and personally.

“KDH’s market knowledge and experience to secure the lender able to meet every request was the difference between success and failure,” Peters said. “I believe that relationships still count.”

Texas Wholesale Distribution Warehouse Financed in Northwest Dallas

Q10 KDH Vice Presidents Matt Franke and Emily Zarcaro arranged $6.4 million in financing for Texas Wholesale in Northwest Dallas, TX.

Lincoln Financial provided an acquisition loan with a 12 year fixed rate below 4% and 25 year amortization for the single tenant, net leased distribution warehouse which spans 127,000 square feet.

“On behalf of our repeat client, MacDougall & Associates, we were able to secure an attractive 12 year fixed interest rate for this sale-leaseback transaction.  MacDougall had been actively targeting attractive investment opportunities in the Dallas market for several quarters, and the borrower moved quickly when this transaction became available.  Lincoln Financial was attracted to the loan due to the asset’s excellent location at the intersection of two Interstate highways, the strong tenancy, and MacDougall’s expertise with this asset type. Working together, we were able to rate lock early at an attractive yield to the investors and close in less than 60 days.” – Matt Franke