How Low Can Spreads Go?

Super-senior CMBS bonds are currently trading in the range of 72 basis points over ten-year interest rate swaps; one year ago, they were trading at 142 basis points over swaps. And as we have come to learn, the narrower bond spreads become, the lower the rate that securitized lenders can profitably charge borrowers. In fact, spreads have narrowed to the point that securitized lenders are giving conventional, portfolio lenders such as commercial banks and insurance companies a run for their money.

What’s driving this phenomenon and is it sustainable? The key driver appears to be the current global quest for yield by institutional investors trying to match income requirements with liabilities to beneficiaries. Where else are you going to invest your money when U.S. Treasury ten-year bonds are trading at yields below 2 percent?

Is it sustainable is another question, especially in the current “jittery” environment, with some many uncertainties, including the survival of the Euro Zone, China’s economy, increased regulation of the financial markets, potential for interest rate increases, the fiscal cliff, the U.S. debt ceiling, etc. Many worry that the financial markets are once again ahead of the physical markets.

For the moment, the investment market seems confident and comfortable with the CMBS market, especially after recent announcements by: Fitch saying that delinquency rates for Fitch-rated CMBS transactions declined to 7.99 percent in December from 8.17 percent a month earlier and 8.37 percent a year earlier; and Trepp saying that 2012 conduit loan payoffs were in excess of expectations with 72 percent of all loans paying off at maturity, 11 percent higher than in 2011. Trepps’ maturity breakdown was as follows: 37 percent paid off six months prior to maturity; 19 percent paid off at balloon date; 9 percent repaid after maturity; and 7 percent paid off at a loss of less than 2 percent.

Need Financing? Become a Real Estate Investment Trust

Prison REITs: been there, done that. Senior housing REITs: old news. Cell towers: how 2012. Single-family housing (aka, REO to rental): 2013’s headline. Next? CBS Outdoor’s announcement that it was investigating “unlocking” the value of its outdoor real estate (i.e., billboards) by converting its portfolio into a REIT. Ignoring the numerous technical issues that need to be addressed, REITs seem to be coming of age as a financing tool for non-traditional assets.  

Monday’s Numbers

The Trepp survey for the most recent period showed spreads continuing to compress, further evidence of investor demand in today’s yield-starved world.

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

1/18/12

Month Earlier

Office

342

214

210

210

200

215

Retail

326

207

207

192

191

205

Multifamily

318

188

202

182

184

202

Industrial

333

201

205

191

190

204

Average Spread

330

203

205

194

188

205

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

1.87%

1.44%

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 ten-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 Five-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

 

 

Multitenant 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 Ten-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

 

 

Multitenant 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): +6.04%
S & P 500 (2): +5.38%
NASDAQ (3): +4.31%
Russell 2000 (4):6.58%
Morgan Stanley U.S. REIT (5):+4.77%

 (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

1/25/13

3-Month

0.01%

0.08%

0.08%

6-Month

0.06%

0.12%

0.11%

2 Year

0.24%

0.27%

0.28%

5 Year

0.83%

0.76%

0.85%

7 Year

 

1.25%

1.36%

10 Year

1.88%

1.86%

1.95%

                                         

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

0.27

3-Month Libor

0.30

0.56