One Week to Go
 

With only seven days to go until $85 billion in sequestration budget cuts are scheduled to take effect, this past week has been filled with dire predictions of their impact. In fact, many are just exhausted trying to figure out what will still be working after the budget cuts come to pass. Because there is nothing one can do except sit and wait, we sit and wait.

Real Estate Roundtable Q1 2013 Sentiment Survey
 

The Real Estate Roundtable’s Q1 2013 survey of senior real estate industry executives showed a general improvement in respondents’ perception of current and future market conditions, tempered by three global issues—budget concerns, job creation, and the prospect of increasing interest rates. The survey measures the views of respondents on current conditions as well as their future outlook on:

  • overall real estate conditions;
  • access to capital markets; and
  • real estate asset pricing.

The following, taken from the survey, is a summary of its topline findings:

  • The Q1 Index saw a modest increase as conditions appear to be slowly improving; that said, optimism is tempered due to lingering concerns about economic and fiscal uncertainties. 
  • As commercial real estate continues its gradual recovery, industry leaders are hoping for economic growth and improving fundamentals—rather than cheap debt—to be the key drivers. 
  • Fueled by low interest rates, asset values continue to appreciate, and in many cases have reached pre-crisis levels; however, the threat of rising interest rates is looming. 
  • The availability of debt capital has been a significant driver of market recovery, especially in “gateway” areas—though less so for riskier assets; equity capital has also been abundant for high-quality, highly tenanted assets.

Ten-Year Fixed-Rate Mortgages Rates by Asset Class

Cushman & Wakefield Equity, Debt, and Structured Finance, in its recently released “Market Commentary,” provided the following ten-year fixed-rates mortgage rates by asset class:

Maximum
Loan-to-Value

Class A

Class B/C

Anchored retail

70–75%

T+220

T+230

Strip centers

65–70%

T+240

T+240

Multifamily – nonagency

70–75%

T+180

T+180

Multifamily – agency

75–80%

T+180

T+180

Distribution/warehouse

65–70%

T+220

T+230

R&D/flex/industrial

65–70%

T+235

T+250

Office

65–75%

T+195

T+210

Full-service hotel

55–76%

T+270

T+295

T is interest rate for 10-year Treasury bonds.

Debt service coverage ratio assumed to be greater than 1.35 to 1.0.

NCREIF Property Index
 

The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index, composed of 7,270 properties valued at $319.9 billion, produced positive total returns for the 12th-consecutive quarter. Total returns for calendar year 2012 were 10.2 percent, composed of a 5.8 percent return from property income and a 4.5 percent from appreciation in property value. For 2011, the index produced overall returns of 14.3 percent.

Retail was the top-performing sector, showing total returns of 11.6 percent, composed of 6.2 percent from income and 5.2 percent from appreciation in value.

The office sector was the only one of the four main groups that underperformed the overall index; both urban and suburban office properties underperformed the overall index.

The multifamily sector, though slowing, continued to outperform; capitalization rates appear to be stabilizing while the rate of appreciation is declining.

Overall, industrial properties outperformed the index.

On a regional basis, the West led, followed by the South (driven by multifamily and retail properties), the Midwest (with results dominated by Chicago’s contribution), and the East.

Sign of the Times
 

We assume it did not go unnoticed that China Vanke, China’s leading developer by sales, will invest in a 669-unit residential property to be developed by Tishman Speyer Properties in San Francisco. It is anticipated that China Vanke will have a 70 percent interest in the project.

“There is no point telling Chinese companies to mind their own domestic business. A good enterprise in the 21st century must be armed with a global vision” Vanke Chairman Wang Shi noted on Weibo, a popular Chinese microblog site.  

Monday’s Numbers

The Trepp survey for the most recent period showed spreads continuing to decrease, coming in four basis points and reaching lows not seen “in forever.” All-in cost for ten-year paper with low loan-to-value ratios remains below 4 percent. 

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

2/15/13

Month earlier

Office

342

214

210

210

180

200

Retail

326

207

207

192

172

191

Multifamily

318

188

202

182

162

184

Industrial

333

201

205

191

168

190

Average spread

330

203

205

194

171

191

10-year Treasury

3.83%

3.29%

1.88%

1.64%

2.01%

1.86%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial mortgage spreads for the period ended January 31, 2013, showed spreads for ten-year, fixed-rate mortgages coming in about 20 basis points across all property sectors compared with the previous survey period. We seem to have entered the “limbo stick” period, in which borrowers and lenders alike wonder how low can they go.

Property Type

Midpoint of Fixed-Rate Commercial Mortgage Spreads for Five-Year Commercial Real Estate Mortgages

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – nonagency

+270

+245

+200

+190

Multifamily – agency

+280

+255

+190

+190

Regional mall

+280

+300

+250

+240

Grocery anchor

+280

+295

+245

+235

Strip and power centers

 

+320

+270

+260

Multitenant Industrial

+270

+305

+250

+240

CBD office

+280

+310

+230

+220

Suburban office

+300

+320

+250

+240

Full-service hotel

+320

+350

+320

+310

Limited-service hotel

+400

+360

+330

+320

5-year Treasury

2.60%

0.89%

0.76%

0.86%

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Property Type

Midpoint of Fixed-Rate Commercial Mortgage Spreads for Ten-Year Commercial Real Estate Mortgages

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – nonagency

+190

+205

+180

+160

Multifamily – agency

+200

+200

+165

+160

Regional mall

+175

+245

+190

+170

Grocery anchor

+190

+240

+185

+165

Strip and power centers

 

+255

+205

+185

Multitenant industrial

+190

+245

+205

+185

CBD office

+180

+250

+180

+160

Suburban office

+190

+265

+205

+185

Full-service hotel

+290

+300

+250

+230

Limited-service hotel

+330

+310

+270

+250

10-year Treasury

3.47%

2.00%

1.86%

1.97%

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Property Type

Midpoint of Floating-Rate Commercial Mortgage Spreads for Three- to Five-Year Commercial Real Estate Mortgages

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – nonagency

+250–300

+200–250

+180–250

+180–250

Multifamily – agency

+300

+220–265

+175–230

+175–230

Regional mall

+275–300

+250–350

+210–275

+210–275

Grocery anchor

+275–300

+240–325

+210–275

+210–275

Strip and power centers

 

+250–350

+225–300

+225–300

Multitenant industrial

+250–350

+270–350

+210–275

+210–275

CBD office

+225–300

+275–350

+180–250

+180–250

Suburban office

+250–350

+300–350

+225–300

+225–300

Full-service hotel

+300–450

+375–475

+275–400

+275–400

Limited-service hotel

+450–600

+375–550

+325–450

+325–450

1-month LIBOR

0.26%

0.30%

0.21%

0.21%

3-month LIBOR

0.30%

0.58%

0.31%

0.30%

Note: A dash indicates a range.

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Year-to-Date Public Equity Capital Markets

DJIA1: 6.84%
S&P 5002: +6.27%
NASDAQ3: +4.71%
Russell 20004: 7.87%
Morgan Stanley U.S. REIT5: +5.19% 

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

2/23/13

3-month

0.01%

0.08%

0.13%

6-month

0.06%

0.12%

0.14%

2-year

0.24%

0.27%

0.27%

5-year

0.83%

0.76%

0.84%

7-year

 

1.25%

1.34%

10-year

1.88%

1.86%

1.97%

                                                  

Key Rates (in Percentages)

 

Current

1 Year Prior

Federal funds rate

0.16

0.10

Federal reserve target rate

0.25

0.25

Prime rate

3.25

3.25

U.S. unemployment rate

7.90

8.70

1-month LIBOR

0.20

0.24

3-month LIBOR

0.29

0.49