Year-to-date issuance of commercial mortgage–backed securities ($56.7 billion) has exceeded the entire amount ($54.3 billion) issued in 2012 and is well on its way to reaching $80 billion or higher, due to a potent combination of institutional investors chasing year-end yield, issuers intent on clearing their books of inventory of unsecuritized loans, and borrowers focused on closing deals before “tapering” becomes a reality and interest rates start to increase.

Monday’s Numbers

The Trepp survey for the period ending September 23, 2013, showed spreads widening slightly as the markets seemed to have settled in from their first exposure to “tampering.” Absent some form of economic and/or political shock to the system, we see spreads for the balance of the year trading in the 4.25 percent to 4.75 percent range.

Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points
(Ten-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

8/6/13

8/13/13

9/6/13

9/13/13

Office

342

214

210

210

175

178

175

178

Retail

326

207

207

192

159

168

161

168

Multifamily

318

188

202

182

154

160

156

160

Industrial

333

201

205

191

162

163

161

163

Average spread

330

203

205

194

163

167

163

167

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.67%

2.71%

2.88%

2.90%

The most recent Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads dated September 9, 2013, showed spreads coming in 5 basis points during the survey period.

We expect the rest of the year to play out as follows: with interest rates expected to increase in the near future, borrowers will focus on closing committed deals as soon as possible so as to lock in today’s cheap financing. On the other hand, you will see lenders trying to dig in their heels and not get locked in to subpar returns for up to a ten-year holding. All-in costs should fall in the 4.50 to 5.00 percent range. 

Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of September 13, 2013)

Property

Maximum
loan-to-value

Class A

Class B

Multifamily (agency)

75–80%

T +205

T +215

Multifamily (nonagency)

70–75%

T +215

T +220

Anchored retail

70–75%

T +220

T +235

Strip center

65–70%

T +240

T +255

Distribution/warehouse

65–70%

T +220

 T +235

R & D/flex/industrial

65–70%

T +235

T +255

Office

65–75%

T +210

T +230

Full-service hotel

55–65%

T +270

T +295

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

Year-to-Date Public Equity Capital Markets
DJIA (1): +16.57%
S & P 500 (2):+19.65%
NASDAQ (3): +21.61%
Russell 2000 (4):+27.22%
Morgan Stanley U.S. REIT (5): +3.24%

(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

9/21/13

3-Month

0.01%

0.08%

0.02%

6-Month

0.06%

0.12%

0.05%

2-Year

0.24%

0.27%

0.45%

5-Year

0.83%

0.76%

1.76%

7-Year

1.35%

1.25%

2.38%

10-Year

1.88%

1.86%

2.93%

Key Rates (in Percentages)

Current

One year prior

Federal funds rate

0.09

0.16

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

0.18

0.22

3-Month LIBOR

0.25

0.37