It’s been a week since I posted to the Cents of Place. I’ve wanted to contribute more in that time, but a number of projects have taken a turn for the more involved. Why? Chaos in the private lending market has placemakers thinking twice and three times about potential partnerships with the public sector.
One client is a well-seasoned developer and investor, looking to break ground this spring for a project in a major transit corridor. Financing is in place for multiple floors of retail and office, and preleasing has gone well. Perhaps, the development team has explored, we could add thirty or more rental or condo housing units by building upwards, with a stepped design to ease concerns about views from the street? Despite their record of selling and managing housing in urban corridors, lenders aren’t enthused.
Part of banks’ lack of spirit on this point is due to the recent spike in the rates banks charge each other for overnight or short-term lending. The enclosed graphic shows how much higher is this short-term interbank rate (LIBOR) than the three-month Treasury bill; this difference is known as the “TED spread.” In October, banks would demand interest over 4.50% higher than the three-month Treasury bill, to lend their funds to other banks. Such a spread between the rates indicated dramatic anxiety among lenders. If you’ve visited with real estate lenders in recent months, you know what this has done to your odds of securing project financing.
The bright side, of course, is that the graph illustrates the precipitous drop in the TED spread, from 4.63% in October to 1.08% as of this afternoon. Hopefully, as economist Jim Hamilton suggests in this post, the shift is part of a larger, positive next chapter for the economy.
Thanks to good friend Courtenay Brown, seasoned bond trader, for providing the graphic. With uncharacteristic brevity, Brown called the drop in the TED spread “pretty good.”