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The following appeared in this week’s Real Estate Roundtable newsletter which may be read in its entirety  at www.rer.org

“Economic & CRE Market Conditions”

Roundtable Survey Shows “Tempered” Outlook on Commercial Real Estate, as Industry Executives Worry About Economic and Policy Risks, Maturing CRE Debt, Weak CMBS Market Recovery.

Although the outlook for commercial real estate has improved somewhat since late last year, the industry’s recovery remains slow, uneven, and vulnerable to macroeconomic and policy risks as well as borrowers’ continued difficulty in refinancing maturing debt, The Real Estate Roundtable’s latest quarterly Sentiment Survey showed. After last year’s disappointing economic performance — influenced by European debt woes and an unprecedented downgrade of U.S. debt — senior real estate executives participating in the Q1 2012 survey expressed wariness in their predictions for the coming year.

“The expectations of leaders in commercial real estate for 2012 are tempered by the whipsaw of last year’s experience,” said Roundtable President and CEO Jeffrey DeBoer. At this time last year, “People thought . . . growth was around the corner” — only to see renewed financial turmoil and economic weakness as the Eurozone crisis deepened and as U.S. policymakers clashed over the debt ceiling. The Sentiment Survey’s “Overall Index” rose to 68 in the latest quarter — a 9-point increase over the Q4 2011 reading of 59, which represented the index’s lowest point since the fall of 2009. The “Current Conditions” Index also improved since the last survey (rising from 58 to 66), while the Future Conditions Index rose from 60 to 70 between Q4 4011 and Q1 2012.

The latest survey also suggests continued improvement in capital market conditions — with more than half of survey respondents predicting growth in both debt and equity for commercial real estate. At the same time, many said securing deals will depend largely on meeting lenders’ “ideal” conditions (in terms of asset quality, vacancy levels, NOI, etc.)

Industry CEOs’ expectations on asset values also improved over the past quarter — with nearly 60% saying they expect an increase in values — yet these, too, were tempered by past experience. As one respondent noted, “Even though 2011 is now behind us, much of the uncertainty that characterized the year has carried over into 2012. Despite encouraging signs of recovery, much like this time last year, a number of threats persist that could derail improvement.”

Noting the ongoing headwinds facing the economy and real estate, Roundtable Chairman Daniel M. Neidich (CEO, Dune Real Estate Partners) said, “Commercial real estate faces continuing pressure from underlying economic problems — weak job creation, erosion of equity throughout much of the country and a massive amount of loans coming due.”

Complicating borrowers’ ability to refinance is the fact that:

  • many loans are “underwater” (with owners owing more on the loan than the underlying collateral is worth)
  • lenders are demanding more equity in transactions
  • commercial real estate credit capacity remains inadequate
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$1.4 Trillion in CRE Debt to Mature by 2015: Equity Infusion Needed to Refinance (page 7 of The Roundtable’s 2012 Policy Agenda – Capital & Credit section)

Although an estimated $362 billion in commercial mortgages are scheduled to mature in 2012 (see p. 7 of the 2012 Policy Agenda), issuance of commercial mortgage-backed securities (CMBS) — a key source of commercial real estate credit — is only expected to reach $30-50 billion this year. “The commercial mortgage-backed securities market continues to struggle,” said Neidich.

“What this Sentiment Survey shows, and our 2012 Policy Agenda supports, is that specific policy steps must be taken to bolster employment, business investment and economic certainty,” Neidich asserted. DeBoer added that “the industry needs to see as much equity capital as possible enter the market to recapitalize properties throughout the country. It is imperative that policymakers adopt measures now that will encourage increased equity investment.”

A top policy priority in this regard is reforming the outdated and discriminatory Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which would encourage foreign equity investment in U.S. commercial real estate and help bridge the roughly $1 trillion equity gap needed to refinance commercial mortgages between 2012 and 2016+.

Monday’s Numbers

During the past month, spreads reported by Trepp LLC narrowed sharply with lenders feeling a heightened sense of competition; that said, we expect spreads to be “range-bound” at current levels as the capital markets wait to see if Greece’s “workout” really works.

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

2/17/12

Month Earlier

Office

342

214

210

211

215

Retail

326

207

207

211

222

Multifamily

318

188

198

200

209

Industrial

333

201

205

205

212

Average Spread

330

203

205

207

215

10-Year Treasury

3.83%

3.29%

1.88%

2.00%

1.85%

The Cushman & Wakefield Sonnenblick-Goldman Survey shows rates unchanged to down five basis points. Lenders seem to be going about their business, reacting to market events as necessary.

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

Multifamily – Non-Agency

+270

+245

+240

Multifamily – Agency

+280

+255

+245

Regional Mall

+280

+300

+300

Grocery Anchored

+280

+295

+295

Strip and Power Centers

+320

+320

Multi-Tenant Industrial

+270

+305

+310

CBD Office

+280

+310

+310

Suburban Office

+300

+320

+320

Full-Service Hotel

+320

+350

+350

Limited-Service Hotel

+400

+360

+360

5-Year Treasury

2.60%

0.89%

0.78%

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

Multifamily – Non-Agency

+190

+205

+210

Multifamily – Agency

+200

+200

+205

Regional Mall

+175

+245

+245

Grocery Anchor

+190

+240

+240

Strip and Power Centers

+255

+255

Multi-Tenant Industrial

+190

+245

+255

CBD Office

+180

+250

+240

Suburban Office

+190

+265

+260

Full-Service Hotel

+290

+300

+290

Limited-Service Hotel

+330

+310

+315

10-Year Treasury

3.47%

2.00%

1.97%

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

Multifamily – Non-Agency

+250-300

+200-250

+200-250

Multifamily- Agency

+300

+220-265

+220-265

Regional Mall

+275-300

+250-350

+210-265

Grocery Anchored

+275-300

+240-325

+200-275

Strip and Power Centers

+250-350

+225-300

Multi-Tenant Industrial

+250-350

+270-350

+225-305

CBD Office

+225-300

+275-350

+225-300

Suburban Office

+250-350

+300-350

+250-325

Full-Service Hotel

+300-450

+375-475

+350-425

Limited-Service Hotel

+450-600

+375-550

+400-500

1-Month LIBOR

0.26%

0.30%

0.27%

3-Month LIBOR

0.30%

0.58%

0.55%

* A dash (-) indicates a range.
Source: Cushman & Wakefield Sonnenblick Goldman.

Year-to-Date Public Equity Capital Markets

DJIA (1): +6.26%
S & P 500 (2): +8.60%
NASDAQ (3): +13.77%
Russell 2000 (4):+11.64%
Morgan Stanley U.S. REIT (5):+6.03%
_____
 (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

2/15/12

3-Month

0.12%

0.01%

.09%

6-Month

0.18%

0.06%

.13%

2 Year

0.59%

0.24%

.30%

5 Year

2.01%

0.83%

.89%

10 Year

3.29%

1.88%

1.98%

Key Rates (in Percentages)

Current

1 Mo. Prior

3 Mo. Prior

6 Mo. Prior

1 Yr. Prior

Fed Funds Rate

0.11

0.08

0.08

0.12

0.16

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

8.30

8.50

8.90

9.10

9.10

1-Month Libor

0.24

0.28

0.26

0.22

0.26

3-Month Libor

0.49

0.56

0.51

0.31

0.31