Recent volatility in the debt capital markets, caused primarily by the mere suggestion that the Federal Reserve might scale back its bond-buying program later this year, is causing any number of transactions to be put on hold. With rates in flux—10-year U.S. Treasuries were 2.6 percent last Tuesday (their highest level in almost two years) and up from 1.6 percent in May—there seems to be “paralysis of analysis” taking place.

Look at the four quadrants. If you are a buyer, the landscape looks as follows. If interest rates are going up, capitalizations can’t be far behind; therefore, property values may hit a speed bump, and even decline, at least on a near term basis. Since no one wants to be said to have paid too much for a property, many buyers are sitting on the sideline, at least on a near-term basis. If you’re the seller, do you hit the bid and try to close before the buyer awakes from his coma or pull back and wait for the markets to settle down? Nobody wants to sell for too little by panicking, but no one wants to try and guess where the top of the market is also.

If you are the lender, you don’t want to find yourself on the wrong side of the yield curve, lending long and locked-in at today’s rates only to see rates increase dramatically. If you’re the borrower, you will want to “hit the bid” to take advantage of today’s low rates; unfortunately, no one wants to talk with you. So, do you take what’s available or gut it out? Not a happy set of choices.

Fortunately, the July 4th holiday provides the capital markets with a well-needed respite and a chance to regroup, calm down, and rationalize the Fed’s activities. 

According to the Geneva Association, the global insurance industry trade organization, rising sea levels combined with increasing risk of flood damage, are making some areas “uninsurable”. The group noted parts of the U.K. and Florida among the highest risk areas. The group also noted that the number of weather-related incidents tripled over the past 30 years.  

Blackstone Enters Commercial Real Estate Mortgage Business  

Looking to exploit what it sees as a void in the market for floating-rate lending, Blackstone expects to originate as much as $2.5 billion of commercial mortgage loans through Blackstone Mortgage Trust, a publically-traded mortgage lending real estate investment trust. The trust will focus on transitional properties, writing primarily senior loans, but will also underwrite B-notes, mezzanine loans and preferred equity. Loans are anticipated to range between $50 million and $500 million on all property types located in the U.S. as well as Europe. Loans are anticipated to be interest-only with terms of three to five years, with coupons equal to LIBOR plus a spread of 375 basis points or more. [As of the writing of this note, one-month LIBOR was trading at approximately 20 basis points]. Loan-to-value ratios are anticipated to range between 60 percent and 80 percent.

Expect more domestic as well as international institutional real estate money managers to enter the debt capital markets to take advantage of this market opportunity.  

Monday’s Numbers

The Trepp survey for the period ending June 21st showed spreads widening four to as much as eight basis points with all-in costs remaining in the low four percent range for top tier assets and in the mid-4.0 percent area for less “pristine” assets and borrowers. The upcoming week should be relatively quiet with both lenders and borrowers thankful to have a respite from recent volatility.

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

6/21/13

Month Earlier

Office

342

214

210

210

176

185

Retail

326

207

207

192

166

174

Multifamily

318

188

202

182

158

164

Industrial

333

201

205

191

164

174

Average Spread

330

203

205

194

166

174

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.52%

1.94%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads for the one-month period ending June 3, 2013 showed spreads for 10-year, fixed rate mortgages secured by Class A property, widening as much as 40 basis points for Class A property with spreads for Class B property widening 20+/- basis points. 

10-Year Fixed Rate Commercial Real Estate Mortgages (as of May 2, 2013)

Property

Maximum
 Loan-to-Value

Class A

Class B

Multifamily (Agency)

75% – 80%

T +195

T +200

Multifamily (Non-Agency)

70% – 75%

T +190

T +195

Anchored Retail

70% – 75%

T +210

T +220

Strip Center

65% – 70%

T +230

T +240

Distribution/Warehouse

65% – 70%

T +210

T +220

R&D/Flex/Industrial

65% – 70%

T +235

T +240

Office

65% – 75%

T +200

T +215

Full-Service Hotel

55% – 65%

T +265

T +290

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

 

Year-to-Date Public Equity Capital Markets

DJIA (1): +13.78%
S&P 500 (2): +12.63%
NASDAQ (3): +12.71%
Russell 2000 (4)+115.09%
Morgan Stanley U.S. REIT (5):+4.49%

 (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

6/28/13

3-Month

0.01%

0.08%

0.03%

6-Month

0.06%

0.12%

0.09%

2-Year

0.24%

0.27%

0.36%

5-Year

0.83%

0.76%

1.39%

7-Year

1.35%

1.25%

1.96%

10-Year

1.88%

1.86%

2.49%

                                                 

Key Rates (in Percentages)

 

Current

1 Yr. Prior

Federal Funds Rate

0.03

0.17

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

0.19

0.25

3-Month LIBOR

0.27

0.46