The National Council of Real Estate Investment Fiduciaries (NCREIF) released its first-quarter 2013 results for the performance of its National Property Index (NPI), which is comprised of 7,181 institutionally owned properties having a value of approximately $329.1 billion. Results are reported on a current quarter, most recent prior quarter, and trailing 12-month basis. Returns are composed of an appreciation and an income component. A “snapshot” summary is available at the NCREIF website at www.ncreif.org.

Returns for the quarter ended March 31, 2013, equaled 2.57 percent, composed of appreciation equal to 1.18 percent and income equal to 1.39 percent; returns were almost the same as the prior quarter ended December 31, 2012—2.54 percent—when appreciation equaled 1.13 percent and income equaled 1.41 percent.

On a trailing 12-month basis, total returns for the period ending March 31, 2013, equaled 10.5 percent as compared with 10.05 percent for the trailing 12-months ended December 31, 2012.

Retail was the best-performing food group in the last quarter, showing total returns equal to 3.72 percent as compared with 2.97 percent for the period ended December 21, 2012; returns for the sector were clearly influenced by the sale pricing and economic performance of regional and super-regional malls.

The multifamily sector ranked second, providing total returns equal to 2.57 percent for the most recent quarter (as compared with 2.81 percent for the prior quarter). Industrial property ranked third with total returns equal to 2.50 percent (as compared with 2.27 percent in the prior period ended December 31, 2012), with office ranking fourth at 1.92 percent (as compared with 2.17 percent in the prior quarter).

From a geographic viewpoint, properties located in the South performed best (3.03 percent total return), followed by those in the West (2.77 percent), the Midwest (2.47 percent), and the East (2.09 percent).

The most recent high-water mark for the indices on a combined, “all-property” basis was the trailing 12-month period ended June 30 2011, when total return equaled 16.70 percent; and it has been downhill (gently) since then, as the following chart shows:

Trailing 12-months ended

Total return

06-30-2011

16.70%

09-30-2011

16.10%

12-31-2011

14.30%

03-31-2012

13.40%

06-30-2012

12.00%

09-30-2012

11.00%

12-31-2012

10.05%

03-31-2013

10.50%

While real estate fundamentals continue to improve, the heady days of capitalization rate compression driving values to insane levels appear to be over (with the exception of a remaining trophy or two) and participants in the real estate industry are starting to realize that future appreciation will be driven by converting increases in net operating income into value.

Pricing Driving Some Banks Away from CRE Deals

A headline, like a picture, is sometimes worth 1,000 (or more) words: “‘Goofy Pricing’ Driving Some Banks Away from CRE Deals.”

What makes this article required reading is that it is built on a series of quotes from bankers warning about current conditions in the commercial mortgage space. Joseph J. Depaolo, CEO and president of New York–based Signature Bank, is quoted as saying the following:

“We’ve seen some of what we would characterize as overly aggressive pricing. What I mean by that, as an example, we’ve seen some banks do 35- and 40- year amortizations. We’ve seen some sub-3 percent, five-year fixed [rate] loans. We’ve seen ten-year fixed at 3 percent. We’ve seen ten-year fixed with no prepayment penalty, which we believe is overly aggressive, and certainly things that we would not do.”

Monday’s Numbers

The Trepp survey for the period ending April 19 showed spreads widening a basis point or two. Rates continue to appear range-bound in the sub–4.0 percent area for “best in breed” borrowers with Class A property located in the strongest markets and in the 4.5 percent range for everyone else.

Asking Spreads over U.S. Treasury Bonds in Basis Points
(Ten-Year Commercial and Multifamily Mortgage Loans
with 50% to 59% Loan-to-Value Ratios)

12/31/09

12/31/10

12/31/11

12/31/12

4/19/13

Month earlier

Office

342

214

210

210

181

174

Retail

326

207

207

192

174

164

Multifamily

318

188

202

182

165

156

Industrial

333

201

205

191

171

161

Average spread

330

203

205

194

172

163

10-year Treasury

3.83%

3.29%

1.88%

1.64%

1.73%

1.92%

The Cushman & Wakefield (C&W) Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads for the period ending April 1, 2013, showed spreads for ten-year, fixed-rate mortgages secured by Class A property, widening 5 to 10 basis points while spreads for Class B property came in similar amounts. 

10-Year, Fixed-Rate Commercial Real Estate Mortgages (as of April 1, 2013)

Property

Maximum
 loan-to-value (%)

Class A

Class B

Multifamily (agency)

75–80

T +175

T +180

Multifamily (Nonagency)

70–75

T +175

T +180

Anchored retail

70–75

T +200

T +210

Strip center

65–70

T +220

T +230

Distribution/warehouse

65–70

T +205

T +215

R&D/flex/industrial

65–70

T +220

T +235

Office

65–75

T +190

T +205

Full-service hotel

55–65

T +255

T +280

Debt-service-coverage ratio assumed to be greater than 1.35 to 1.

 In its analysis of current lending sources’ terms and conditions, C&W noted the following metrics, which will assist potential borrowers in sizing loan requests:

Capital source

Life company/ pension fund

Investment fund/ finance company

Money center/ offshore banks

Conduits

Local/regional banks

Preferred loan size

>$10 million

$20 million–$100 million

$10 million–$100 million`

>$10 million

$3 million–$25 million

Cost of capital

2.75%–5.00%

5.25%–7.50%

2.75%–5.00%

3.50%–4.75%

3.00%–5.00%

Loan-to-value

50%–65%

55%–85%

50%–65%

Up to 75%

50%–65%

Debt yield

12%–9%

12%–7%

12%–9%

10%–8%

12%–9%

DSCR

1.25x–1.50x

0.75x–1.40x

1.35x–1.50x

>1.20x

1.35X

Other

Nonrecourse

Nonrecourse

Potential recourse

Nonrecourse

Potential recourse

Prefer fixed rate

Floating rate or fixed via swaps

Fixed or floating

Fixed

Fixed or floating

3- to 20-year term

2- to 5-year term

2- to 5-year term; 10-year term possible

5- to 10-year term

3- to 5-year term; 10-year term possible

Year-to-Date Public Equity Capital Markets

DJIA (1): +12.27%

S&P 500 (2): +10.94%

NASDAQ (3): +8.60%

Russell 2000 (4): 10.11%

Morgan Stanley U.S. REIT (5): +11.95%

(1) Dow Jones Industrial Average. (2) Standard & Poor’s 500 Stock Index. (3) NASD Composite Index.
(4) Small Capitalization segment of U.S. equity universe. (5) Morgan Stanley REIT Index.

 

U.S. Treasury Yields

12/31/11

12/31/12

4/27/12

3-Month

0.01%

0.08%

0.05%

6-Month

0.06%

0.12%

0.09%

2-Year

0.24%

0.27%

0.22%

5-Year

0.83%

0.76%

0.68%

7-Year

1.35%

1.25%

1.10%

10 Year

1.88%

1.86%

1.70%

                                                  

Key Rates (in Percentages)

 

Current

One year prior

Federal funds rate

0.14

0.14

Federal Reserve target rate

0.25

0.25

Prime rate

3.25

3.25

U.S. unemployment rate

7.60

8.70

1-month LIBOR

0.20

0.24

3-month LIBOR

0.28

0.47