Editor’s Note: Monday’s Numbers will not be published next week (May 13, 2013); look for the next issue on May 20, 2013.

Show Us the Money  

Who has it and are they lending? We see the scoreboard as follows:

Lender

2012 Volume (in $ billions)

Projected 2013 volume
(in $ billions)

Projected 2014 volume
(in $ billions)

Insurance companies

$51.4

$55.0

$55.0

Securitized

$48.4

$60.0

$75.0

Commercial banks

$120.0

$120.0

$120.0

Total

$219.6

$235.0

$250.0

Sources: Commercial Mortgage Alert; Trepp; ACLI; Federal Reserve.

Insurance companies seem to be nearing capacity, due to an array of factors ranging from increased competition from securitized lenders and top-tier commercial banks to a concern about having too much money invested in today’s super-low-interest-rate mortgages. In addition, if one looks at insurers on a historical basis, one sees that their absolute high-water mark occurred in 2007, the year when they lent approximately $56.6 billion at the height of the recent capital markets insanity—a period that management does not want to see repeated. Stretch our projection to $60 billion if you wish, but that’s it.

The top ten mortgage originators among insurance companies include the following:

1.       MetLife;
2.       Prudential;
3.       Northwestern Mutual;
4.       New York Life;
5.       MassMutual;
6.       TIAA-CREF;
7.       Principal Life;
8.       AIG;
9.       ING; and
10.    John Hancock.

Securitized lenders continue their comeback as more and more companies establish platforms and more and more institutional investors enjoy the relative value of “super senior” commercial mortgage-backed securities (CMBS) as compared with alternative debt investments. While it lasts, securitized lenders have become increasingly competitive, giving insurance companies a run for their money in what had historically been “life lender” territory. Securitized lending should continue to increase as more and more equity investors focus on properties in secondary and tertiary markets, the historical lifeblood of the securitized lenders. Demand will do that to you.

The ripple you see in the pool is commercial banks finally rolling up their pants legs and wading back into the water after a multiyear hiatus during which time they focused on resolving distressed loans (and extending those they could not resolve), deleveraging, and generally getting their regulatory house in order. As banks and thrift institutions hold approximately 47 percent, one should expect them to play an increasingly active role in the mortgage markets as their internal cleanup continues. That said, we do not think management has quite as big an appetite for just any real estate as in prior years and will stick pretty close to shore.

The top ten banks in real estate loan holdings include:

1.       Wells Fargo;
2.       J.P. Morgan;
3.       Bank of America;
4.       U.S. Bancorp;
5.       BB&T;
6.       PNC Financial;
7.       New York Community Bancorp;
8.       M&T Bank;
9.       TD Bank; and
10.    Capital One.

Translating this into transaction volume, and assuming 75 percent loan-to-value lending, 2014 volume should be in the $333 billion range.

Monday’s Numbers

The Trepp survey for the period ending April 26, 2013, showed spreads unchanged for all property sectors, range-bound in the sub-4 percent area for Class A property located in the strongest markets and owned by the strongest sponsors; everyone else is “suffering” through rates in the 4.5 percent range.

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

4/26/13

Month earlier

Office

342

214

210

210

181

174

Retail

326

207

207

192

174

164

Multifamily

318

188

202

182

165

156

Industrial

333

201

205

191

171

161

Average spread

330

203

205

194

172

163

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

1.70%

1.92%

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 ten-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. 

Ten-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 (nonagency)

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): +14.27%
S&P 500 (2): +13.20%
NASDAQ (3): +11.89%
Russell 2000 (4): 12.37%
Morgan Stanley U.S. REIT (5): +14.42%

(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

5/3/13

3-Month

0.01%

0.08%

0.05%

6-Month

0.06%

0.12%

0.08%

2-Year

0.24%

0.27%

0.22%

5-Year

0.83%

0.76%

0.73%

7-Year

1.35%

1.25%

1.17%

10-Year

1.88%

1.86%

1.78%

                                            

Key Rates (in Percentages)

 

Current

One year prior

Federal funds rate

0.15

0.16

Federal Reserve target rate

0.25

0.25

Prime rate

3.25

3.25

U.S. unemployment rate

7.50

8.70

1-Month LIBOR

0.20

0.24

3-Month LIBOR

0.28

0.47

Register for the ULI Real Estate Finance and Investment 2013, June 4 and 5 in San Francisco.