Throughout 2012, balance sheet lenders continued to strengthen their financial position through a combination of increased earnings and more profitable restructuring and/or resolution of “troubled” commercial mortgage loans. When combined with continued improvement in real estate fundamentals, a strong case exists for increased allocations of capital to commercial real estate mortgage loans as compared to 2012.

Another clear trend in 2012 (and one expected to continue) was increased competition between insurance companies assuming higher risk positions in the capital stack as they searched for increased yield and securitized lenders able to bid on more pristine assets as their cost of capital declined as fixed income investors bought previously ignored CMBS tranches, driving down their yield. Against this background, CMBS delinquencies continue to improve while insurance company delinquent loans remain minimal.

Against a background of estimates of roughly $60 billion in issuance in 2013, the commercial mortgage-backed securities market will get its first test of the year when a $1.4 billion offering comes to market this week. As detailed in the following chart, delinquency rates continue to decline in response to improving fundamentals, increasing investor confidence that the worst is behind us:

Delinquency rates: Percentage 30+ Days Delinquent by Property Type

Dec-12

Nov-12

Oct-12

3 Months

6 Months

1 Year

Industrial

11.24

11.48

11.53

12.21

11.54

12.03

Lodging

11.73

12.24

11.24

12.16

12.95

12.20

Multifamily

13.98

14.21

14.26

14.09

15.17

15.57

Office

10.66

10.37

10.20

10.48

10.45

8.97

Retail

7.62

7.75

8.03

8.09

8.17

7.85

Overall

9.71

9.71

9.39

9.99

10.16

9.58

Source: Trepp.

Avoiding the Fiscal Cliff

The following summary of the the America Taxpayer Relief Act was prepared by The Real Estate Roundtable, who graciously has allowed ULI to re-print it:
Income tax rates: Current income tax rates are extended for families earning $450,000 or less and individuals earning $400,000 or less annually. Taxpayers earning more than these thresholds will be taxed at 39.6%, up from 35%.
Investment tax rates: The top capital gains and dividend rate remain at 15% for those below the $450,000/$400,000 income thresholds, and are increased to 20% for those with incomes above those amounts. Current law remains in place for carried interest.
Estate tax: The current $5 million per-person estate tax exemption remains (with the $5 million indexed for inflation) but the rate is increased to 40% from the current 35%.
Tax extenders: Individual and business tax extenders (including 15 year depreciation for leasehold improvements placed into service after 12-31-11) are extended through 2013.
Bonus depreciation: The 50% bonus depreciation provision is extended for one year (also applicable to leasehold improvements).
The Research and Development (R&D) tax credit was extended through 2013.
Work Opportunity Tax Credit extended one year; Section 179 – keeps in place the 2010/2011 levels of a maximum amount of $500k and $2 million phase-out for 2012 and 2013;
Accelerated Depreciation provides for 50 percent expensing for qualifying property purchased and placed in service before January 1, 2014 (and January 1, 2015 for certain long-term assets and transportation).
Alternative Minimum Tax (AMT): The individual AMT is patched permanently.
PEP and Pease: The personal exemption phase-out (PEP) and overall limit of itemized deductions (Pease) is reinstated for families with incomes over $300,000 and individuals with incomes over $250,000.
Other credits: The American Opportunity Tax Credit, the enhanced Child Tax Credit, and the enhanced Earned Income Tax Credit from the American Recovery and Investment Act (the “stimulus”) are extended for five years.
“Doc fix”: The patch on the 29% cut in Medicare provider payments is extended for one year.
Sequester delay: The $109 billion spending cuts mandated by the Budget Control Act are averted for two months due to $12 billion in spending cuts split evenly between defense and non-defense spending and $12 billion of increased revenues applied as an offset.
Extended unemployment insurance: Federal extended unemployment insurance will continue for another year.

Norway’s Sovereign Wealth Fund to Invest $11 billion in U.S. Commercial Real Estate

Norway’s $681 billion sovereign wealth fund announced that it was looking to invest as much as $11 billion in U.S. commercial property beginning in the first quarter of 2013. Initially, investments will focus on prime retail and office property located in core markets such as New York, Washington, D.C., and Boston, thereby helping to support already heady pricing for trophy property in these markets. Notwithstanding the naysayers who complain about capitalization rates for core assets continuing to be compressed due to excess demand, Norway, and other sovereign funds, are long—very long—term investors, and are clearly willing to sacrifice current yield for what they believe will be long-term growth in income and appreciation in value. Check back with us in 15 to 20 years and we’ll see how this worked out.

Architect’s Report Increase in Billings

The American Institute of Architect’s Billing Index rose for the fourth straight month, reaching its highest level since 2007. While clearly a positive signal for the economy, it also denotes that the commercial real estate sector is entering—slowly—an “expansionary” phase as increased billings are the precursor of increased construction (which is the precursor of increased supply which is the precursor of …).

Monday’s Numbers

The Trepp survey is in the process of being updated, the results of which will be reported next week.

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

12/7/12

Week Earlier

Month Earlier

Office

342

214

210

222

226

220

Retail

326

207

207

212

217

210

Multifamily

318

188

202

197

202

200

Industrial

333

201

205

212

215

209

Average Spread

330

203

205

211

215

210

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

1.63%

1.66%

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

 

 

 

Multifamily – Non-Agency

+250-300

+200-250

 

 

 

Multifamily- Agency

+300

+220-265

 

 

 

Regional Mall

+275-300

+250-350

 

 

 

Grocery Anchored

+275-300

+240-325

 

 

 

Strip and Power Centers

 

+250-350

 

 

 

Multi-Tenant Industrial

+250-350

+270-350

 

 

 

CBD Office

+225-300

+275-350

 

 

 

Suburban Office

+250-350

+300-350

 

 

 

Full-Service Hotel

+300-450

+375-475

 

 

 

Limited-Service Hotel

+450-600

+375-550

 

 

 

1-Month LIBOR

0.26%

0.30%

 

 

 

3-Month LIBOR

0.30%

0.58%

 

 

 

* A dash (-) indicates a range.

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


Year-to-Date Public Equity Capital Markets
DJIA (1): +2.53%
S & P 500 (2): +2.82%
NASDAQ (3): +2.72%
Russell 2000 (4):3.51%
Morgan Stanley U.S. REIT (5):+1.68%

 (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

12/31/12

3-Month

0.12%

0.01%

0.08%

6-Month

0.18%

0.06%

0.12%

2 Year

0.59%

0.24%

0.27%

5 Year

2.01%

0.83%

0.76%

7 Year

 

 

1.25%

10 Year

3.29%

1.88%

1.86%

                                               

Key Rates (in Percentages)

 

Current

1 Yr. Prior

Federal Funds Rate

0.17

0.07

Federal Reserve Target Rate

0.25

0.25

Prime Rate

3.25

3.25

US Unemployment Rate

7.80

8.70

1-Month Libor

0.21

0.30

3-Month Libor

0.31

0.58