What Just Happened?
 

While many of us were trying to “out-parse” each other as we dissected the public ruminations of the Federal Reserve on the path of QE2, the capital markets seemed to have voted with their feet.

As of mid-July, the national average 30-year fixed-rate home mortgage was priced at 4.51 percent—its highest level since July 2011, when it reached 4.55 percent. This bump clearly came as a result of speculation that the Fed would soon rein in its monthly bond purchase program. This has proved to be . . . well, speculation. The 30-year fixed-rate home mortgage was priced at 3.50 percent in early May. For a buyer of a $250,000 home seeking a 75 percent loan-to-value (purchase price) mortgage ($187,500), his or her monthly payment has increased from $842 to $951, or 13 percent. So far, sticker shock has not set in.

In the commercial mortgage market, spreads have widened uniformly 30 basis points across all property types over the past six or so weeks. Interest rates on ten-year Treasury bonds have increased 75 +/- basis points over the same period for a total all-in cost of 5 percent or more, compared with 4 percent, where we were a few short weeks ago. While this increase has not stopped the market from functioning as securitized lenders and insurance companies continue to duke it out on a trophy-by-trophy-property basis, it certainly is causing the leveraged buyer to consider recalibrating his or her purchase price.

Both of these facts can prove to be problematic: for the single-family market, it is an issue of affordability; for the commercial property market, fully 75 percent of all transactions involve leverage.

Monday’s Numbers

The Trepp survey for the period ending July 12, 2013, showed spreads basically unchanged and everyone acknowledging that they need to get deals done if they want to eat, regardless of the fact that ten-year Treasury bond yields are 60 to 75 basis points wider and loan spreads have widened 30 +/- basis points in the past month.

 

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

7/12/13

Month earlier

Office

342

214

210

210

178

172

Retail

326

207

207

192

164

162

Multifamily

318

188

202

182

160

150

Industrial

333

201

205

191

163

155

Average spread

330

203

205

194

166

160

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.78%

2.25%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads was updated midweek, showing spreads widening 30+/- basis points over the past 45 days. 

Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of June 15, 2013)

Property

Maximum
 loan-to-value

Class A

Class B

Multifamily (agency)

75–80%

T +210

T +215

Multifamily (nonagency)

70–75%

T +215

T +220

Anchored retail

70–75%

T +240

T +250

Strip center

65–70%

T +260

T +270

Distribution/warehouse

65–70%

T +240

 T +250

R&D/flex/industrial

65–70%

T +255

T +270

Office

65–75%

T +230

T +245

Full-service hotel

55–65%

T +295

T +320

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

Year-to-Date Public Equity Capital Markets

DJIA (1): +18.62%
S&P 500 (2): +17.15%
NASDAQ (3): +18.81%
Russell 2000 (4): +23.68%
Morgan Stanley U.S. REIT (5): +9.67

(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

7/19/13

3-Month

0.01%

0.08%

0.02%

6-Month

0.06%

0.12%

0.07%

2-Year

0.24%

0.27%

0.30%

5-Year

0.83%

0.76%

1.30%

7-Year

1.35%

1.25%

1.90%

10-Year

1.88%

1.86%

2.48%

                                     

Key Rates (in Percentages)

 

Current

One year prior

Federal funds rate

0.10

0.10

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

0.26

0.45