Transaction Volume, Pricing Metrics and a Prediction or Two for 2013

According to Real Capital Analytics (RCA), commercial property transaction volume increased approximately 24 percent year-over-year, driven by an array of factors ranging from the global search for yield to irrational fears regarding changes in the tax codes to the availability of mortgage financing at lifetime low interest rates. Sales totaled approximately $283 billion versus $229.2 billion in 2012.

Transaction activity should remain at the same general level in 2013 and, subject to a disruption in the equity and/or debt capital markets, is likely to reach $300 billion. It’s a momentum play, as the reasons that drove 2012 sales remain in place.

An analysis of a range of property sales indicates pricing made up a substantial measure of the decline suffered between 2007 and 2010 and is now on average within 20 percent of the peak levels achieved between mid-2007 and 2008, with the caveat that some markets are substantially higher and some are measurably lower.

Capitalization rates are leveling off (see recent National Council of Real Estate Investment Fiduciaries National Property Index and Capitalization Rate Reports and Real Estate Research Corporation’s surveys) and will be impacted by recent increases in yields for 10-year U.S. Treasury bonds; changes in value in 2013 will come primarily from growth in net operating income and not from capitalization rate compression. The real estate industry will once again be forced to make money the old fashioned way; they’ll have to earn it.

RCA estimates that of the $394 billion of mortgages that became “troubled” during the recent downturn, almost 60 percent has been resolved, leaving $194 billion of loans to be dealt with. The following two charts are instructive as they detail outstanding distressed loans by property type and lender, thereby providing direction as to what is currently or will be shortly available and where it “resides”, i.e., whose balance sheet it’s on.

Distressed Commercial Mortgage Loans by Property Type

Property Type

Outstanding Distress ($M)

Worked Out (%)

Office

$41,974

60%

Multifamily

30,637

64

Retail

26,188

62

Industrial

11,846

56

Hotel

23,386

58

Land

25,004

43

Other

4,998

42

Source: Real Capital Analytics.

Distressed Commercial Mortgage Loans by Lender Type

Property Type

Outstanding Distress ($M)

Worked Out (%)

CMBS

$80,607

55%

International Bank

9,690

69

Domestic Bank

37,727

60

Insurance Company

3,166

67

Other

32,839

59

Source: Real Capital Analytics.

If one combines the approximately 60 percent of the originally distressed commercial real estate mortgages worked out with financial institutions continuing need to de-leverage as well as repatriate capital to their home markets, it appears we may be reaching the end phase of this game with only the lower quality loans remaining to be resolved. We see lenders becoming more aggressive in 2013, and expect resolutions to increase to approximately 75 percent, even if lenders are required to take higher than anticipated losses.

2012 CMBS issuance equaled approximately $48 billion, and could reach $60 billion in 2013 given the number of conduits active in the market (25+), the reception five current offerings are receiving in the marketplace (as evidenced by where 10-year, AAA-rated bonds are trading), and the increasingly frenetic global search for yield.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads coming in a further 10-plus basis points as securitized and conventional lenders continue their war of attrition, compressing lending spreads in response to investors continuing to bid down, i.e., lower, yields on super-senior tranches of recent CMBS offerings. Each week, securitized lenders seem to become more competitive with conventional lenders; where this will end is anyone’s guess. If you’re a borrower, stop giggling; now’s the time to lock-in rates.

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

1/25/13

Month Earlier

Office

342

214

210

210

193

215

Retail

326

207

207

192

182

205

Multifamily

318

188

202

182

175

195

Industrial

333

201

205

191

182

202

Average Spread

330

203

205

194

183

204

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.04%

1.86%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial mortgage spreads for the period ending January 31, 2013 showed spreads for 10-year, fixed rate mortgages, coming in approximately 20 basis points across all property sectors compared to the prior survey period. We seem to have entered the “limbo stick” a period in which borrower’s and lender’s alike wonder “how low can they go”.

Property Type

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

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – Non-Agency

+270

+245

+200

+190

Multifamily – Agency

+280

+255

+190

+190

Regional Mall

+280

+300

+250

+240

Grocery Anchored

+280

+295

+245

+235

Strip and Power Centers

+320

+270

+260

Multi-Tenant Industrial

+270

+305

+250

+240

CBD Office

+280

+310

+230

+220

Suburban Office

+300

+320

+250

+240

Full-Service Hotel

+320

+350

+320

+310

Limited-Service Hotel

+400

+360

+330

+320

5-Year Treasury

2.60%

0.89%

0.76%

0.86%

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Property Type

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

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – Non-Agency

+190

+205

+180

+160

Multifamily – Agency

+200

+200

+165

+160

Regional Mall

+175

+245

+190

+170

Grocery Anchor

+190

+240

+185

+165

Strip and Power Centers

+255

+205

+185

Multi-Tenant Industrial

+190

+245

+205

+185

CBD Office

+180

+250

+180

+160

Suburban Office

+190

+265

+205

+185

Full-Service Hotel

+290

+300

+250

+230

Limited-Service Hotel

+330

+310

+270

+250

10-Year Treasury

3.47%

2.00%

1.86%

1.97%

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Property Type

Mid-Point of Floating-Rate Commercial Mortgage Spreads For Three to Five-Year Commercial Real Estate Year Mortgages

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – Non-Agency

+250-300

+200-250

+180-250

+180-250

Multifamily- Agency

+300

+220-265

+175-230

+175-230

Regional Mall

+275-300

+250-350

+210-275

+210-275

Grocery Anchored

+275-300

+240-325

+210-275

+210-275

Strip and Power Centers

+250-350

+225-300

+225-300

Multi-Tenant Industrial

+250-350

+270-350

+210-275

+210-275

CBD Office

+225-300

+275-350

+180-250

+180-250

Suburban Office

+250-350

+300-350

+225-300

+225-300

Full-Service Hotel

+300-450

+375-475

+275-400

+275-400

Limited-Service Hotel

+450-600

+375-550

+325-450

+325-450

1-Month LIBOR

0.26%

0.30%

0.21%

0.21%

3-Month LIBOR

0.30%

0.58%

0.31%

0.30%

* A dash (-) indicates a range.

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Year-to-Date Public Equity Capital Markets

DJIA (1): +6.91%
S & P 500 (2): +6.10%
NASDAQ (3): +5.29%
Russell 2000 (4):7.28%
Morgan Stanley U.S. REIT (5):+5.29%

(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

2/2/13

3-Month

0.01%

0.08%

0.06%

6-Month

0.06%

0.12%

0.11%

2 Year

0.24%

0.27%

0.27%

5 Year

0.83%

0.76%

0.88%

7 Year

1.25%

1.40%

10 Year

1.88%

1.86%

2.04%

Key Rates (in Percentages)

Current

1 Yr. Prior

Federal Funds Rate

0.16

0.10

Federal Reserve Target Rate

0.25

0.25

Prime Rate

3.25

3.25

US Unemployment Rate

7.90

8.70

1-Month Libor

0.20

0.26

3-Month Libor

0.30

0.54