Credit Rating Agencies Shrug Off Sequester, Say More Cuts Needed

Both Fitch and Moody’s Investors Service still give the U.S. their top rating, but both have placed it on a negative outlook, effectively warning that Washington will need to address the nation’s long-term debt issues in 2013 or face a downgrade. While some think the financial world’s reaction to a decrease in the U.S. credit rating would be the same as when Standard & Poor’s cut their rating last year—a flight to safety and liquidity, i.e., a flight to U.S. Treasury securities—others argue that the financial markets could easily decide to penalize the U.S. simply by reducing their investment in U.S. government securities. This could in turn lead to higher interests and a slower U.S. economy.

On a more positive note 

  • The U.S. added 236,000 jobs in February compared to economist’s predicted 160,000 as the jobless rate declined to 7.70 percent, its lowest level since the end of 2008.
  • The Federal Reserve’s Beige Book economic survey for the mid-January to end of February period showed overall economic activity expanding across all districts. Credit for commercial real estate was reported as “widely available”.
  • The Federal Reserve reported that 17 of 18 of the U.S.’ largest banks passed the agency’s “stress test,” showing they have sufficient capital to operate in the event of a hypothetical sharp economic downturn.
  • The percentage of commercial mortgage-backed securities loan balances in Fitch-rated transactions that are delinquent at least 60 days or are in foreclosure declined from 7.91 percent in January 2013 to 7.61 percent in February. The rate stood at 8.30 percent one year earlier.   

Monday’s Numbers

The Trepp survey for the most recent period showed spreads unchanged for all property sectors as all-in cost for 10-year paper with low loan-to-value ratios remains sub-four percent. Absent the appearance of any uncertainty, the market has seemed to have settled into a risk/reward range it is comfortable with. 

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

3/1/13

Month Earlier

Office

342

214

210

210

180

183

Retail

326

207

207

192

174

176

Multifamily

318

188

202

182

165

164

Industrial

333

201

205

191

165

172

Average Spread

330

203

205

194

171

174

Ten-Year Treasury

3.83%

3.29%

1.88%

1.64%

1.86%

2.04%

Property Type

Mid-Point 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 – Non-Agency

+270

+245

+200

+190

Multifamily – Agency

+280

+255

+190

+190

Regional Mall

+280

+300

+250

+240

Grocery Anchored

+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

Five-Year Treasury

2.60%

0.89%

0.76%

0.86%

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

Property Type

Mid-Point 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 – Non-Agency

+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

Mid-Point of Floating-Rate Commercial Mortgage Spreads For Three to Five-Year Commercial Real Estate Year Mortgages

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – Non-Agency

+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 Anchored

+275-300

+240-325

+210-275

+210-275

Strip and Power Centers

 

+250-350

+225-300

+225-300

Multi-Tenant 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%

* A dash (-) indicates a range.

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

Year-to-Date Public Equity Capital Markets

DJIA (1): +9.87%
S&P 500 (2): +8.76%
NASDAQ (3): +7.45%
Russell 2000 (4)10.97%
Morgan Stanley U.S. REIT (5):+5.86%

 (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

3/9/13

3-Month

0.01%

0.08%

0.10%

6-Month

0.06%

0.12%

0.11%

2 Year

0.24%

0.27%

0.27%

5 Year

0.83%

0.76%

0.9%

7 Year

 

1.25%

1.43%

10 Year

1.88%

1.86%

2.06%

                                                

Key Rates (in Percentages)

 

Current

1 Yr. Prior

Federal Funds Rate

0.16

0.13

Federal Reserve Target Rate

0.25

0.25

Prime Rate

3.25

3.25

US Unemployment Rate

7.70

8.70

1-Month LIBOR

0.20

0.24

3-Month LIBOR

0.28

0.47