Real Estate Research Corporation recently released its second-quarter 2013 survey of institutional participants in the commercial real estate market, the results of which are summarized below:

Investment Conditions

2Q13

1Q13

2Q12

2Q11

Office: CBD

6.8

6.6

6.4

6.4

Office: Suburban

4.9

5.3

4.7

4.4

Industrial: Warehouse

7.6

6.9

7.0

6.3

Industrial: R&D

6.3

6.0

5.4

5.2

Industrial: Flex

5.8

5.8

5.0

4.9

Retail: Regional mall

6.4

5.6

5.4

5.7

Retail: Power center

5.4

5.3

4.9

5.3

Retail: Neighborhood

6.8

6.4

6.5

6.0

Multifamily

7.0

7.1

7.5

7.5

Hotel

6.5

6.4

6.2

6.7

With the exception of suburban office (down from 5.3 to 4.9 on a scale of 1 to 9) and multifamily (down from 7.1 to 7.0), investment conditions improved quarter over quarter, reflecting the view that real estate remains an attractive investment alternative.

Buy, Sell or Hold?

Buy (%)

Sell (%)

Hold (%)

Office: CBD

59

29

12

Office: Suburban

35

35

30

Industrial: Warehouse

53

11

36

Industrial: R&D

25

25

50

Industrial: Flex

24

35

41

Retail: Regional mall

31

38

31

Retail: Power center

19

38

43

Retail: Neighborhood

31

31

38

Multifamily

28

33

39

Hotel

54

8

38

All types

36

28

36

Beyond a bias toward central business district (CBD) office, warehouse industrial, and hotels, there appear to be no screaming “buys” in investors’ minds. “Sell” sentiment appears to be gaining an upper hand in all categories except warehouse and hotel; we sense that many investors are considering taking a share of profits gained from opportunistic investments made during the 2008 to 2011/2012 period.

Pre–Tax Yield (IRR) (%)

Pre–tax yield (IRR) (%)

Change in basis points from prior quarter

Office: CBD

7.9

-10

Office: Suburban

9.1

+10

Industrial: Warehouse

8.2

0

 Increases

Change in basis points from prior quarter

Change in basis points from prior quarter

Industrial: Flex

9.7

+60

Retail: Regional mall

8.2

+10

Retail: Power center

8.6

-20

Retail: Neighborhood

8.2

-20

Multifamily

7.5

-20

Hotel

10.3

+30

With the exception of flex industrial space, which seems to have “fallen out of bed,” pretax required yields (internal rates of return [IRRs]) moved within a narrow band, indicating investors’ “satisfaction” with current market pricing.

Capitalization Rates

Capitalization rates (%)

Change in basis points from prior quarter

Office: CBD

6.1

-10

Office: Suburban

7.3

0

Industrial: Warehouse

6.6

0

Industrial: R&D

7.4

-10

Industrial: Flex

8.0

+30

Retail: Regional mall

6.2

-10

Retail: Power center

7.2

-20

Retail: Neighborhood

6.7

-10

Multifamily

5.5

+20

Hotel

6.1

+10

Capitalization rates remained within a narrow band during the quarter. Transaction volume was reported at approximately $71 billion—an increase of 13 percent quarter over quarter.

E-Commerce Increases 18 Percent Year Over Year

According to data from the U.S. Census Bureau and Trepp LLC, second-quarter 2013 e-commerce retail sales increased 18 percent year over year and now account for almost 6 percent of total retail sales—an increase of 70 basis points since the second quarter of 2012.

Monday’s Numbers

The Trepp survey for the period ending August 9, 2013, showed average spreads widening 2 or 3 basis points as everyone—borrowers, lenders, and traders alike—is looking forward to Labor Day, hopeful that it will signal the end of increases in ten-year U.S. Treasury rates, which began on May 1 with the ten-year at 1.66 percent and closed last Friday at 2.84 percent—an increase of 118 basis points, taking the base lending rate above 4.5 percent.

At the moment, rates are increasing faster on an interperiod basis than we can report them. While everyone says liquidity remains plentiful, we are not really going to be in a position to project the directional bias of the markets until we get past Labor Day and participants’ strategies become more evident.

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

12/31/09

12/31/10

12/31/11

12/31/12

7/19/13

7/26/13

8/2/13

8/9/13

Office

342

214

210

210

184

176

178

175

Retail

326

207

207

192

168

158

163

159

Multifamily

318

188

202

182

161

154

156

156

Industrial

333

201

205

191

168

161

162

162

Average spread

330

203

205

194

160

170

165

163

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.52%

2.50%

2.63%

2.58%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads, which was updated August 12, 2013, showed spreads coming in 10 +/- basis points during the survey period. 

Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of August 12, 2013)

Property

Maximum
 loan-to-value

Class A

Class B

Multifamily (agency)

75–80%

T +210

T +220

Multifamily (nonagency)

70–75%

T +220

T +225

Anchored retail

70–75%

T +225

T +240

Strip center

65–70%

T +245

T +260

Distribution/warehouse

65–70%

T +225

 T +240

R&D/flex/industrial

65–70%

T +240

T +260

Office

65–75%

T +215

T +235

Full-service hotel

55–65%

T +275

T +300

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

Year-to-Date Public Equity Capital Markets

DJIA (1): +15.09%
S&P 500 (2): +16.10%
NASDAQ (3): +19.32%
Russell 2000 (4): +20.60%
Morgan Stanley U.S. REIT (5): -2.76%

(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

8/18/13

3-Month

0.01%

0.08%

0.05%

6-Month

0.06%

0.12%

0.08%

2-Year

0.24%

0.27%

0.36%

5-Year

0.83%

0.76%

1.60%

7-Year

1.35%

1.25%

2.25%

10-Year

1.88%

1.86%

2.84%

                                     

Key Rates (in Percentages)

 

Current

One year prior

Federal funds rate

0.05

0.15

Federal Reserve target rate

0.25

0.25

Prime rate

3.25

3.25

U.S. unemployment rate

7.40

8.50

1-Month LIBOR

0.18

0.24

3-Month LIBOR

0.26

0.43