Sequestration
 

Last week surprised both analysts and investors, as it lacked the volatility in the capital markets that many had expected to occur as the sequestration enacted as part of the Budget Control Act of 2011 approached. The $85 billion in enacted spending reductions are divided equally between spending for defense and domestic programs.

The same analysts and investors are now trying to puzzle out the impact of the sequestration on various industry sectors and companies. An obvious example is the public or private owner/developer of office property located in the Washington, D.C., metropolitan area who is exposed to both governmental whims as well as the reactions (and defensive actions) of governmental contractors, lobbyists, nongovernmental organizations (NGOs), etc. Just as obvious is the potentially negative impact on multifamily occupancy and rental rates and shopping center sales as local incomes and spending habits are influenced by the sequestration. The hospitality industry could be dinged as both business and vacation travel is curtailed in the Washington area, as well as nationwide, if the anticipated negative impact of sequestration on the economy occurs as predicted.

Commercial Mortgage–Backed Securities 

CMBS originations year-to-date reached $15.9 billion last week, as compared with $3.3 billion for the same time period in 2012. It certainly looks as if the most aggressive projections of $100 billion in originations are possible.

But the market is getting crowded with deals. Investors are extracting their reward by pushing spreads wider, which will in turn increase the rates paid by borrowers. Obviously, we are not at or near the point where there is a borrowers’ revolt; this is just an item of interest, a word of caution, and an explanation of what we see happening in the market.

Insurance Company Lending Activity Circa 2012

According to the American Council of Life Insurers (ACLI), life insurance companies wrote approximately $45.6 billion in commercial mortgages in 2012, literally unchanged from 2011’s $45.5 billion. This is clear evidence that the market is becoming increasingly competitive, as CMBS lenders become both more aggressive and confident about the depth of their market and buyer interest.

The following are the key metrics from the ACLI survey:

  • The insurers surveyed wrote 2,575 loans, 2,433 of which, having a balance of $36.4 billion, were fixed-rate loans.
  • Average maturity equaled 10.75 years.
  • Debt-service-coverage ratio equaled 2.1 to 1 as compared with 1.97 to 1 in 2011.
  • Loan-to-value ratio averaged 60.8 percent (as compared with 59.8 percent in 2011).
  • Average coupon for fixed-rate loans was 4.2 percent, or 274 basis points over U.S. Treasuries.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads unchanged with all-in cost for ten-year paper with low loan-to-value ratios remains sub-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

2/22/13

Month Earlier

Office

342

214

210

210

180

193

Retail

326

207

207

192

173

182

Multifamily

318

188

202

182

163

175

Industrial

333

201

205

191

164

182

Average spread

330

203

205

194

170

183

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

1.97%

1.86%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial mortgage spreads for the period ending January 31, 2013, showed spreads for ten-year, fixed-rate mortgages coming in approximately 20 basis points across all property sectors compared with the prior survey period. We seem to have entered the “limbo stick”—a 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-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

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 Year 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-anchored

+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%

* A dash (–) indicates a range.

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

Year-to-Date Public Equity Capital Markets

DJIA (1): +7.52%
S&P 500 (2): +6.45%
NASDAQ (3): +4.98%
Russell 2000 (4): 7.70%
Morgan Stanley U.S. REIT (5): +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