Coming Soon to a Mortgage Market Near You

There could be a new and sizable player in the commercial real estate mortgage business, as more than one sovereign wealth fund (SWF) is rumored to be investigating originating commercial real estate loans for its own book.

From the SWF’s viewpoint, the logic and metrics appear compelling. Say a fund wants to purchase a class-A building located in a core (or gateway) market. Today, that’s a trade with a 4.0 percent handle (or yield). Alternatively, the SWF could originate a 60 percent loan-to-value first mortgage at a rate equal to 200 basis points over 10-year U.S. Treasuries, or 4.00 percent—no harm, no foul so far—which it would combine with a subordinate tranche, equal to 15 percent of the capital stack, priced at 6.0 percent. From the borrower’s perspective, it has traded a slice of its current return (4.0 percent) for higher leverage (75 percent loan-to-value) at a modest overall additional cost. From the lender’s point of view, its risk profile, assuming competent and stringent underwriting, has not increased markedly while its return on invested capital (the principal amount of the loan) has increased markedly.

After a suitable waiting period, it is reasonable to assume that the fund’s initial focus on core properties will likely expand to non-core properties in non-gateway markets, either organically or by strategic acquisition and/or investment in a local sharpshooter.

ULI Money Chase 2013: Appetites for Risk Increasing in Low-Yield Environment

In February, the ULI Orange County/Inland Empire Capital Markets Initiative Council held its 2013 ULI Money Chase program featuring moderated panel discussions (“Equity Looking for Yield by Moving Beyond Core” and “Debt Markets: Too Much Capital, Not Enough Deals”) among  real estate professional active in the equity and debt capital markets.

Click here for ead a summary of both discussions.

U.S. Employment Tracker

The March 2013 edition of Cassidy Turley Commercial Real Estate Services’ “U.S. Employment Tracker” noted:

  • The U.S. economy created a preliminary 236,000 net new jobs in February 2013 – one of the strongest monthly gains in the current recovery.
  • Office-using employment increased by 100,000 jobs – the largest monthly increase since September 2011

Given the number of articles analyzing changes in office usage, ranging from communal workspaces to more on-site amenities to increased telecommuting to increased “teaming”, this month’s office use job estimate represents an interesting juxtaposition on a topic of continuing importance to the commercial real estate space.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads decreasing 5 basis points as all-in cost for 10-year paper with low loan-to-value ratios remains at sub-four percent levels. Competition among lenders remains stiff with conduits continue to win deals from conventional lenders such as commercial banks and insurance companies.  

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

3/8/13

Month Earlier

Office

342

214

210

210

179

184

Retail

326

207

207

192

170

177

Multifamily

318

188

202

182

160

166

Industrial

333

201

205

191

161

173

Average Spread

330

203

205

194

168

175

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

1.86%

1.99%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads for the period ending March 5, 2013 showed spreads for 10-year, fixed rate mortgages, basically unchanged as compared to the prior survey period ending February 4th.

Liquidity, whether sourced privately from commercial banks and insurance companies, or publicly via the CMBS market, remains abundant and priced aggressively as lenders compete for business. 

10-Year Fixed Rate Commercial Real Estate Mortgages (as of March 5, 2013)

Property

Maximum
 Loan-to-Value

Class A

Class B

Multifamily (Agency)

75% – 80%

T +190

T +195

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 +225

T +240

Office

65% – 75%

T +195

T +210

Full Service Hotel

55% – 65%

T +260

T +285

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

  Year-to-Date Public Equity Capital Markets

DJIA (1): +10.76%
S & P 500 (2): +9.43%
NASDAQ (3): +7.60%
Russell 2000 (4)12.14%
Morgan Stanley U.S. REIT (5):+10.54%

 (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

3/15/13

3-Month

0.01%

0.08%

0.09%

6-Month

0.06%

0.12%

0.11%

2-Year

0.24%

0.27%

0.25%

5-Year

0.83%

0.76%

0.83%

7-Year

1.35% 

1.25%

1.41%

10-Year

1.88%

1.86%

1.99%

                                             

Key Rates (in Percentages)

 

Current

1 Yr. Prior

Federal Funds Rate

0.17

0.15

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