What kind of a year will 2013 turn out to be? All in all, a pretty good one. Capitalization rates have fluctuated in a narrow band all year, with no sign of a breakout or a breakdown. While the race between the path and direction of cap rates, interest rates, and growth in net operating income appears to be postponed until 2015, an improving economy—combined with improving real estate fundamentals—may mean that the race will not need to be run.

Transaction volume appears on a path to exceed 2012’s, with only the multifamily and hotel sectors underperforming. All of the other sectors seem to be selling well, recording significant increases in transaction volume.

Equity needed to fund acquisitions appears available in size and willing to support literally any investment strategy; the same thing can be said about the availability of debt capital. Commercial mortgage–backed security (CMBS) issuance is on track to have dominated the debt market in 2013, with the likelihood of repeating in 2014.

Monday’s Numbers

The Trepp survey for the period ending November 15, 2013, showed spreads mixed, widening for multifamily and industrial, neutral for retail, and narrowing for office. Significant change remains unlikely before year-end unless an event overtakes the market. A basis point here, a basis point there as the markets focus has turned to closing deals by year-end. Absent an event of some kind, we should expect spreads to stay within a narrow band through year-end 2013.

Asking Spreads over U.S. 10-Year Treasury Bonds in Basis Points
(10-Year Commercial and Multifamily Mortgage Loans for Properties with 50% to 59% Loan-to-Value Ratios)

12/31/09

12/31/10

12/31/11

12/31/12

10/25/13

11/1/13

11/8/13

11/18/13

Office

342

214

210

210

173

181

183

177

Retail

326

207

207

192

168

174

175

175

Multifamily

318

188

202

182

163

159

162

166

Industrial

333

201

205

191

166

162

164

169

Average spread

330

203

205

194

168

169

171

172

10-Year Treasury

3.83%

3.29%

.88%

1.64%

2.70%

2.65%

2.77%

2.71%

 

The most recent Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads dated November 4, 2013, showed spreads coming in 15 basis points during the survey period.

Applying an average spread of 200 basis points, borrowers are looking at all-in costs of about 4.75 to 5.00 percent for fixed-rate mortgages with a 70 to 75 percent loan-to-value ratio. These spreads must be attractive to both borrowers as well as lenders as the Mortgage Bankers Association recently reported that third-quarter commercial/multifamily origination volume was up 29 percent, year over year. The increase in origination volume was led by CMBS whose volume increased 105 percent year over year, followed by life insurance companies with a 72 percent increase year over year.

10-Year Fixed-Rate Commercial Real Estate Mortgages (as of November 4, 2013)

Property

Maximum

 loan-to-value

Class A

Class B

Multifamily (agency)

75–80%

T +195

T +200

Multifamily (nonagency)

70–75%

T +200

T +210

Anchored retail

70–75%

T +205

T +220

Strip center

65–70%

T +225

T +240

Distribution/warehouse

65–70%

T +200

 T +215

R&D/flex/industrial

65–70%

T +215

T +235

Office

65–75%

T +195

T +215

Full-service hotel

55–65%

T +250

T +275

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


Year-to-Date Public Equity Capital Markets

Dow Joes Industrial Average: +22.59%

Standard & Poor’s 500 Stock Index:+26.54%

NASDAQ: +32.20%

Russell 2000 (1):+32.44%

Morgan Stanley U.S. REIT Index: 0.00%

(1) Small-capitalization segment of U.S. equity universe.

U.S. Treasury Yields

12/31/11

12/31/12

11/24/13

3-Month

0.01%

0.08%

0.07%

6-Month

0.06%

0.12%

0.10%

2-Year

0.24%

0.27%

0.31%

5-Year

0.83%

0.76%

1.37%

7-Year

1.35%

1.25%

2.10%

10-Year

1.88%

1.86%

2.75%

 

Key Rates (in Percentages)

Current

One year prior

Federal funds rate

0.10

0.17

Federal Reserve target rate

0.25

0.25

Prime rate

3.25

3.25

U.S. unemployment rate

7.30

8.50

1-Month LIBOR

0.17

0.21

3-Month LIBOR

0.24

0.31