Cap Rates Mixed  

Real Estate Research Corporation’s fourth quarter 2012 Real Estate Investment Criteria survey showed investment conditions and capitalization rates mixed quarter-over-quarter with the markets seemingly needing time to catch its collective breath after a frenetic quarter during which equity capital flooded the markets.

As the following chart indicates, investment conditions (rated on a scale of 1 equals poor to 10 equals excellent) were mixed (which is another way of saying all over the place):

Investment Conditions

Property Sector

3Q 2012

4Q 2012

Change

Office-CBD

6.2

6.1

-0.1

Office-Suburban

4.7

4.6

-0.1

Industrial-Warehouse

6.9

7.1

+0.2

Industrial-R & D

5.4

5.5

+0.1

Industrial-Flex

5.0

5.1

+0.1

Retail-Regional Mall

5.6

5.5

-0.1

Retail-Power Center

4.9

5.3

+0.4

Retail-Neighborhood

6.3

6.4

+0.1

Multifamily

7.2

6.9

-0.3

Hospitality

6.8

6.3

-0.5

Let’s ignore changes between -0.1 and +0.1 and focus on trying to rationalize those sectors where the changes quarter-over-quarter were more pronounced. We can see the change in industrial-warehouse as reflecting investor’s increased confidence in the economy and part of a logical progression that starts with increased employment leading to increased consumer spending leading to requirements for increased inventories and voila, the need for more industrial space.

In regard to power centers, it would appear to us that they may have become oversold as many investors and analysts have been down on the breed, worried about the health of big box retailers. Possibly, investors are having a “uh-oh” moment and see a need to stake a claim to greater investment in the sector as the economy improves.

The downward dip in multifamily and hospitality seem the easiest to explain as the sectors have been white hot with investment dollars pouring in and now it’s time to take a rest period and fine tune strategies.

Capitalization Rates

Property Sector

3Q 2012

4Q 2012

Change

Office-CBD

6.20%

6.10%

-0.10%

Office-Suburban

7.20%

7.30%

+0.10%

Industrial-Warehouse

6.50%

6.60%

+0.10%

Industrial-R & D

7.40%

7.40%

0.00%

Industrial-Flex

7.80%

7.70%

-0.10%

Retail-Regional Mall

6.80%

6.40%

-0.40%

Retail-Power Center

7.20%

7.10%

-0.10%

Retail-Neighborhood

6.70%

6.60%

-0.10%

Multifamily

5.40%

5.40%

0.00%

Hospitality

8.30%

7.90%

+0.40%

“All Property”

6.95%

6.85%

-0.10%

Capitalizations rates seem pretty stable with the exception of regional malls (which decreased 0.4%) and hospitality (which increased 0.4%).  The quantum change in regional malls is hard to explain as so few of them trade; the sector is primarily controlled by institutional investors and REITs, none of whom we see as sellers, regardless of price, as there is no place to reinvest the proceeds. Hospitality is sort of an enigma as investment conditions deteriorated (indicating an overbought sector) while cap rates decreased indicating inflows of buy-side capital.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads coming in as much as 21 basis points as investors continue to chase yields on debt securities such as commercial mortgage-backed securities. Need proof: AAA, average life 10-year CMBS 2.0 securities, were trading at 142 basis points over 10-year swaps one year ago; on January 17th, they were trading at 71 basis points over swaps.

The further spreads come in, the more competitive securitized lenders can be in pricing loans. And evidence is starting to mount that more and more owners are to consider a securitized execution as compared to a conventional one, causing some analysts to increase their projections of CMBS issuance in 2013 to reach the $75 billion level, quite the increase from 2012’s $48.4 billion.  

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

12/31/12

1/11/12

Month Earlier

Office

342

214

210

210

206

224

Retail

326

207

207

192

193

218

Multifamily

318

188

202

182

181

202

Industrial

333

201

205

191

193

216

Average Spread

330

203

205

194

193

215

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

1.66%

1.94%

The Cushman & Wakefield Equity, Debt, and Structured Finance Commercial Mortgage Spread monthly survey of commercial mortgage spreads for the period ending January 3, 2013 showed spreads for 10-year, fixed rate mortgages, coming in approximately 5 to 10 basis points across all property sectors over the past 30 days.

Property Type

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

12/31/10

12/31/11

12/31/12

 

 

Multifamily – Non-Agency

+270

+245

+200

 

 

Multifamily – Agency

+280

+255

+190

 

 

Regional Mall

+280

+300

+250

 

 

Grocery Anchored

+280

+295

+245

 

 

Strip and Power Centers

 

+320

+270

 

 

Multi-Tenant Industrial

+270

+305

+250

 

 

CBD Office

+280

+310

+230

 

 

Suburban Office

+300

+320

+250

 

 

Full-Service Hotel

+320

+350

+320

 

 

Limited-Service Hotel

+400

+360

+330

 

 

5-Year Treasury

2.60%

0.89%

0.76%

 

 

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

Property Type

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

12/31/10

12/31/11

12/31/12

 

 

Multifamily – Non-Agency

+190

+205

+180

 

 

Multifamily – Agency

+200

+200

+165

 

 

Regional Mall

+175

+245

+190

 

 

Grocery Anchor

+190

+240

+185

 

 

Strip and Power Centers

 

+255

+205

 

 

Multi-Tenant Industrial

+190

+245

+205

 

 

CBD Office

+180

+250

+180

 

 

Suburban Office

+190

+265

+205

 

 

Full-Service Hotel

+290

+300

+250

 

 

Limited-Service Hotel

+330

+310

+270

 

 

10-Year Treasury

3.47%

2.00%

1.86%

 

 

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

Property Type

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

12/31/10

12/31/11

12/31/12

 

 

Multifamily – Non-Agency

+250-300

+200-250

+180-250

 

 

Multifamily- Agency

+300

+220-265

+175-230

 

 

Regional Mall

+275-300

+250-350

+210-275

 

 

Grocery Anchored

+275-300

+240-325

+210-275

 

 

Strip and Power Centers

 

+250-350

+225-300

 

 

Multi-Tenant Industrial

+250-350

+270-350

+210-275

 

 

CBD Office

+225-300

+275-350

+180-250

 

 

Suburban Office

+250-350

+300-350

+225-300

 

 

Full-Service Hotel

+300-450

+375-475

+275-400

 

 

Limited-Service Hotel

+450-600

+375-550

+325-450

 

 

1-Month LIBOR

0.26%

0.30%

0.21%

 

 

3-Month LIBOR

0.30%

0.58%

0.31%

 

 

* A dash (-) indicates a range.

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

Year-to-Date Public Equity Capital Markets

DJIA (1): +4.16%
S & P 500 (2): +4.19%
NASDAQ (3): +3.82%
Russell 2000 (4):5.12%
Morgan Stanley U.S. REIT (5):+3.35%

 (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

1/18/13

3-Month

0.01%

0.08%

0.08%

6-Month

0.06%

0.12%

0.10%

2 Year

0.24%

0.27%

0.28%

5 Year

0.83%

0.76%

0.77%

7 Year

 

1.25%

1.24%

10 Year

1.88%

1.86%

1.87%

                                                

Key Rates (in Percentages)

 

Current

1 Yr. Prior

Federal Funds Rate

0.16

0.08

Federal Reserve Target Rate

0.25

0.25

Prime Rate

3.25

3.25

US Unemployment Rate

7.80

8.70

1-Month Libor

0.20

0.28

3-Month Libor

0.30

0.56