Here are some quick takes on the session “Captal Markets: Who Has the Capital and Who Is Getting It” at ULI’s Spring Meeting in San Diego. 

The panel was moderated by Christopher Luderman, President, Brokerage Services and Capital Markets at CBRE and four discussion leaders: Chip Fedalen, Executive Vice President Group Head, Wells Fargo Commercial Real Estate; John Miller, Senior Managing Director, Tishman Speyer; Michael Stedman, Senior Executive Vice President, Union Bank; and Jon Zehner, Global Head of Capital Markets, LaSalle Investment Management.

The discussion covered a wide array of topics, touching on major trends and themes affecting the real estate capital markets; key takeaways included the following:

  • Panelists noted an increasing flow of foreign capital into the U.S. real estate markets, both through multi-participant commingled-like funds as well as on a direct basis. In fact, while many investors will continue to invest through managed type accounts, allocations to direct investment and ownership will be an increasing share of total investment as the amount of capital allocated to U.S. commercial real estate real estate increases on an investor-by-investor portfolio basis. This will be especially true of sovereign wealth funds who want to participate in day-to-day management and “decision making.”
  • Panelists noted a number of reasons underlying offshore investors growing interest in U.S. real estate investment including: higher returns on investment than are available in many of their “home” markets; political safety; increased liquidity; transparency; diversification; and rule of law.
  • Recovery among European lenders lags that of their U.S. counterparts by six to 12 months; meanwhile, the Euro-lending business is becoming increasingly competitive with “new” capital sources such as Japanese financial institutions, U.S. commercial banks, sovereign wealth funds, and global private debt funds entering the market literally “daily”.
  • Pricing of real estate debt continues to become more aggressive as lenders react and respond to increased competition from traditional as well as non-traditional sources; the capital stack is becoming increasingly more complicated and complex as new participants enter the debt markets, and historical participants play new, different, and more complex roles.
  • Participants noted an “immense amount of liquidity” from non-bank sources “sloshing around”, waiting for opportunities.
  • Panelists noted that lending spreads are narrowing; lending structures are deteriorating, and leverage is increasing as underwriting becomes more complex due to increased competition; when asked if commercial real estate is doomed to repeat the last cycle, panelists agreed that was “certainly possible” if undisciplined behavior remained unchecked.
  • In regard to the equity (investment) side of the equation, panelists noted that investors search for yield was causing many investors to become “incautious” as they assumed risks associated with investing in secondary and tertiary markets and niche investment strategies in which they were “inexperienced.”
  • In response to the moderator’s question regarding the availability of construction financing, panelists agreed there was little, if any, demand for speculative new construction. 

Monday’s Numbers

The Trepp survey for the period ending May 10th showed spreads unchanged for all property sectors with 10-year financing for top tier property and borrowers in the sub-4.0 percent range and rates in the mid-4.0 percent area for less “pristine” assets and borrowers.

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

5/1013

Month Earlier

Office

342

214

210

210

151

178

Retail

326

207

207

192

174

172

Multifamily

318

188

202

182

164

164

Industrial

333

201

205

191

174

178

Average Spread

330

203

205

194

174

173

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

1.90%

1.84%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads for the period ending May 2, 2013 showed spreads for 10-year, fixed rate mortgages secured by Class A property, coming in as much as 15 basis points during the past month with spreads for Class B property narrowing a similar amount. 

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 +165

T +180

Multifamily (Non-Agency)

70% – 75%

T +175

T +180

Anchored Retail

70% – 75%

T +170

T +210

Strip Center

65% – 70%

T +190

T +230

Distribution/Warehouse

65% – 70%

T +185

T +215

R & D/Flex/Industrial

65% – 70%

T +185

T +235

Office

65% – 75%

T +175

T +205

Full Service Hotel

55% – 65%

T +235

T +280

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

Year-to-Date Public Equity Capital Markets

DJIA (1): +17.17%
S&P 500 (2): +16.92%
NASDAQ (3): +15.88%
Russell 2000 (4)17.30%
Morgan Stanley U.S. REIT (5):+17.33%

 (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

5/17/13

3-Month

0.01%

0.08%

0.04%

6-Month

0.06%

0.12%

0.08%

2 Year

0.24%

0.27%

0.26%

5 Year

0.83%

0.76%

0.84%

7 Year

1.35%

1.25%

1.32%

10 Year

1.88%

1.86%

1.95%

                                                

Key Rates (in Percentages)

 

Current

1 Yr. Prior

Federal Funds Rate

0.12

0.17

Federal Reserve Target Rate

0.25

0.25

Prime Rate

3.25

3.25

US Unemployment Rate

7.50

8.70

1-Month Libor

0.20

0.24

3-Month Libor

0.27

0.47