“Capitalization Rates [With One Exception] Decline Across All Property Sectors in Q1 2012”

According to the most recent survey by Real Estate Research Corporation (RERC), average capitalization rates continued to decline as more and more capital is invested in real estate. As the following chart indicates, RERC’s All Property average narrowed 14 basis points, from 7.19 percent to 7.05 percent.

Winners during the period included multifamily (down 10 basis points); central business district office (down 40 basis points); neighborhood retail (down 20 basis points); industrial-warehouse (down 10 basis points); and lodging (down 60 basis points). Four sectors—suburban office, malls, power centers, and research and development industrial—were neutral during the period while one sector—flex industrial—lost ground with spreads reported to have increased 10 basis points.

Is there a principal driver? Not that we can see. Rather, it appears the accumulation of a number of “positives”—hard asset versus volatile financial asset; higher current return on investment than financial assets; and positive leverage available in size, term , and rate to name a few. Our expectation is that this trend will continue for a while in response to investor appetites and requirements as well as in response to global financial market volatility and uncertainty.

Period

1Q 2012

4Q 2011

Increase/
Decrease

All Property

7.05%

7.19%

(0.14%)

Multifamily

5.70%

5.80%

(0.10%)

Office-CBD

6.30%

6.70%

(0.40%)

Office-Suburban

7.60%

7.60%

Retail-Mall

6.50%

6.50%

Retail-Neighborhood

6.90%

7.10%

(0.20%)

Retail-Power

7.20%

7.20%

Industrial-Warehouse

6.90%

7.00%

(0.10%)

Industrial-R & D

7.70%

7.70%

Industrial-Flex

8.00%

7.90%

+0.10%

Lodging

7.80%

8.40%

(0.60%)

The Trepp LLC survey showed spreads widening over the past two weeks in response to the yield on 10-year Treasury bonds which has narrowed 15+/- basis points. Lending spreads continue to move in a narrow range with overall cost attractive at all maturities and from a wide array of capital sources. Many lenders seem to have “drawn a line in the sand” relative to pricing with “floors” relatively common.

With floors skirting around 4.0 percent for the shortest maturity (5 years), financing mains attractive and very affordable.

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

12/31/09

12/31/10

12/31/11

4/13

Month Earlier

Office

342

214

210

206

199

Retail

326

207

207

195

189

Multifamily

318

188

198

184

189

Industrial

333

201

205

189

189

Average Spread

330

203

205

194

192

10-Year Treasury

3.83%

3.29%

1.88%

2.05%

2.21%

Over the past month, the Cushman & Wakefield Sonnenblick-Goldman Survey narrowed, with 10-year rates improving as much as 40 basis points for some property sectors.

Property Type

Mid-Point of Fixed Rate Commercial Mortgage
Spreads For 5 Year Commercial Real Estate Mortgages

12/31/10

1/5/12

1/26/12

2/28/12

3/28/12

Multifamily – Non-Agency

+270

+245

+240

+240

+230

Multifamily – Agency

+280

+255

+245

+210

+195

Regional Mall

+280

+300

+300

+300

+275

Grocery Anchored

+280

+295

+295

+290

+270

Strip and Power Centers

 

+320

+320

+315

+295

Multi-Tenant Industrial

+270

+305

+310

+310

+285

CBD Office

+280

+310

+310

+295

+270

Suburban Office

+300

+320

+320

+310

+290

Full-Service Hotel

+320

+350

+350

+350

+325

Limited-Service Hotel

+400

+360

+360

+360

+335

5-Year Treasury

2.60%

0.89%

0.78%

0.83%

1.03%

Source: Cushman & Wakefield Sonnenblick Goldman.

Property Type

Mid-Point of Fixed Rate Commercial Mortgage
Spreads For 10 Year Commercial Real Estate Mortgages

12/31/10

1/5/12

1/26/12

2/28/12

3/28/12

Multifamily – Non-Agency

+190

+205

+210

+210

+200

Multifamily – Agency

+200

+200

+205

+180

+165

Regional Mall

+175

+245

+245

+235

+275

Grocery Anchor

+190

+240

+240

+230

+270

Strip and Power Centers

 

+255

+255

+250

+290

Multi-Tenant Industrial

+190

+245

+255

+250

+280

CBD Office

+180

+250

+240

+320

+270

Suburban Office

+190

+265

+260

+250

+290

Full-Service Hotel

+290

+300

+290

+290

+325

Limited-Service Hotel

+330

+310

+315

+315

+345

10-Year Treasury

3.47%

2.00%

1.97%

1.90%

2.21%

Source: Cushman & Wakefield Sonnenblick Goldman.

Property Type

Mid-Point of Floating-Rate Commercial Mortgage
Spreads For 3 – 5 Commercial Real Estate Year Mortgages

12/31/10

1/5/12

1/26/12

2/28/12

3/28/12

Multifamily – Non-Agency

+250-300

+200-250

+200-250

+200-250

+200-250

Multifamily- Agency

+300

+220-265

+220-265

+220-265

+220-265

Regional Mall

+275-300

+250-350

+210-265

+200-265

+200-265

Grocery Anchored

+275-300

+240-325

+200-275

+200-275

+200-275

Strip and Power Centers

 

+250-350

+225-300

+225-300

+225-300

Multi-Tenant Industrial

+250-350

+270-350

+225-305

+225-305

+225-305

CBD Office

+225-300

+275-350

+225-300

+225-300

+225-300

Suburban Office

+250-350

+300-350

+250-325

+250-325

+250-325

Full-Service Hotel

+300-450

+375-475

+350-425

+275-400

+275-400

Limited-Service Hotel

+450-600

+375-550

+400-500

+350-550

+325-450

1-Month LIBOR

0.26%

0.30%

0.27%

0.24%

0.24%

3-Month LIBOR

0.30%

0.58%

0.55%

0.49%

0.47%

A dash (-) indicates a range.

Source: Cushman & Wakefield Sonnenblick Goldman.

Year-to-Date Public Equity Capital Markets

DJIA (1): +6.64%
S & P 500 (2): +9.62%
NASDAQ (3): +15.17%
Russell 2000 (4):+8.51%
Morgan Stanley U.S. REIT (5):+10.31%
_____
 (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

12/31/10

12/31/11

4/21/12

3-Month

0.12%

0.01%

0.07%

6-Month

0.18%

0.06%

0.12%

2 Year

0.59%

0.24%

0.26%

5 Year

2.01%

0.83%

0.84%

7 Year

 

 

1.36%

10 Year

3.29%

1.88%

1.96%

                                          

Key Rates (in Percentages)

 

Current

1 Mo. Prior

3 Mo. Prior

6 Mo. Prior

1 Yr. Prior

Fed Funds Rate

0.13

0.15

0.08

0.08

0.11

Federal Reserve Target Rate

0.25

0.25

0.25

0.25

0.25

Prime Rate

3.25

3.25

3.25

3.25

3.25

US Unemployment Rate

8.20

8.30

8.50

9.00

8.90

1-Month Libor

0.24

0.24

0.28

0.24

0.21

3-Month Libor

0.47

0.47

0.56

0.42

0.27