Commentary on recent financial headlines by Stephen R. Blank, ULI Senior Fellow for Finance

“The LIBOR Scandal: The Rotten Heart of Finance”—The Economist

A scandal over key interest rates is about to go global. The number that the traders were toying with determines the prices that people and corporations around the world pay for loans or receive for their savings. It is used as a benchmark to set payments on about $800 trillion worth of financial instruments, ranging from complex interest-rate derivatives to simple mortgages. The number determines the global flow of billions of dollars each year. Yet it turns out to have been flawed.

Politicians, regulators and bankers are casting about for another benchmark. They would like it to be less dependent on subjective estimates from a club of banks that generate vast revenues from the opaque business of transacting over-the-counter derivatives that are based on the very rate they are charged with setting. The U.K. government has announced a review of the LIBOR-setting process which is expected to conclude in the autumn with recommendations for changing the way rates are set and for regulatory oversight of the process. But the same dilemma that led to LIBOR’s creation continues to dog the search for an alternative: there simply is not enough trading, particularly at the six-month and 12-month lending periods, to be sure that the rate genuinely reflects the market.

Chief Executive Officer Survey—The Conference Board

According to a new survey by the Conference Board, the confidence level of corporate chief executive officers declined dramatically in the second quarter 2012 with only 17 percent of respondents viewing the economy positively compared with 67 percent in the first quarter. Further, only 20 percent of survey participants expect an improvement in six months, down from 59 percent.

“Modest to Moderate Growth” in Most Districts—Federal Reserve Beige Book Economic Survey

The Federal Reserve’s Beige Book economic survey for the period June to early July showed economic activity increasing at a modest to moderate pace in most Federal Reserve districts. Overall, there were more signs of a slowing U.S. economy than in the prior month’s survey, with the possibility of a European recession combined with an uncertain U.S. fiscal policy in advance of the presidential election weighing on survey participants’ minds and responses. The next Beige Book will be released on August 29, just in time to ruin everyone’s Labor Day weekend.

Equity REITs Posted Total Return of 5.97 Percent in June—FTSE

According to the FTSE NAREIT Equity REIT Index, equity REITs showed total returns for June of 5.97 percents compared with negative 4.41 percent in May. The best performing sectors were timber (9.86 percent) and self-storage (8.22 percent). The worst-performing sectors, which showed positive returns for the month, were multifamily (2.08 percent) and hotels (4.54 percent). For the six months ended June 30, the Index is up 14.91 percent, including an average 3.29 percent dividend.

Monday’s Numbers

The Trepp, LLC survey showed spreads basically unchanged during the most recent survey period. Subject to an unpredictable “black swan”-like event (which is certainly possible in today’s uncertain and volatile capital markets), the balance of  this year is likely to be range-bound by lenders instituting floor pricing in the 4.0 percent to 4.5 percent range.

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

7/12/12

Month Earlier

Office

342

214

210

239

239

Retail

326

207

207

230

234

Multifamily

318

188

198

223

226

Industrial

333

201

205

229

230

Average Spread

330

203

205

230

232

10-Year Treasury

3.83%

3.29%

1.88%

1.49%

1.87%

The Cushman & Wakefield Equity, Debt, and Structured Finance Commercial Mortgage Spread survey showed spreads for 10-year fixed rate mortgages unchanged during the survey period.

Property Type

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

12/31/10

3/28/12

4/27/12

5/30/12

6/28/12

Multifamily – Non-Agency

+270

+230

+240

+250

+245

Multifamily – Agency

+280

+195

+200

+210

+225

Regional Mall

+280

+275

+275

+300

+300

Grocery Anchored

+280

+270

+270

+295

+295

Strip and Power Centers

 

+295

+295

+320

+320

Multi-Tenant Industrial

+270

+310

+285

+305

+305

CBD Office

+280

+295

+270

+295

+300

Suburban Office

+300

+310

+290

+315

+315

Full-Service Hotel

+320

+350

+340

+360

+360

Limited-Service Hotel

+400

+360

+350

+370

+370

5-Year Treasury

2.60%

0.83%

0.83%

0.69%

0.69%

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

3/28/12

4/27/12

5/30/12

6/28/12

Multifamily – Non-Agency

+190

+200

+210

+220

+220

Multifamily – Agency

+200

+165

+170

+190

+200

Regional Mall

+175

+275

+220

+245

+245

Grocery Anchor

+190

+270

+200

+230

+235

Strip and Power Centers

 

+290

+235

+260

+255

Multi-Tenant Industrial

+190

+280

+240

+260

+260

CBD Office

+180

+270

+220

+250

+250

Suburban Office

+190

+290

+245

+270

+265

Full-Service Hotel

+290

+325

+260

+295

+290

Limited-Service Hotel

+330

+345

+290

+320

+310

10-Year Treasury

3.47%

2.21%

1.95%

1.62%

1.58%

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

3/28/12

4/27/12

5/30/12

6/28/12

Multifamily – Non-Agency

+250-300

+200-250

+200-250

+200-250

+200-260

Multifamily- Agency

+300

+220-265

+220-265

+220-265

+220-265

Regional Mall

+275-300

+200-265

+200-265

+210-275

+210-275

Grocery Anchored

+275-300

+200-275

+200-275

+205-275

+210-275

Strip and Power Centers

 

+225-300

+225-300

+225-300

+225-300

Multi-Tenant Industrial

+250-350

+225-305

+225-305

+235-305

+235-305

CBD Office

+225-300

+225-300

+225-300

+225-300

+225-300

Suburban Office

+250-350

+250-325

+250-325

+250-325

+250-325

Full-Service Hotel

+300-450

+275-400

+250-400

+275-400

+275-400

Limited-Service Hotel

+450-600

+325-450

+325-450

+325-450

+325-450

1-Month LIBOR

0.26%

0.24%

0.24%

0.24%

0.24%

3-Month LIBOR

0.30%

0.47%

0.47%

0.47%

0.47%

* A dash (-) indicates a range.

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

Year-to-Date Public Equity Capital Markets

DJIA (1): +4.95%
S & P 500 (2): +8.35%
NASDAQ (3): +12.29%
Russell 2000 (4):+6.85%
Morgan Stanley U.S. REIT (5):+13.63%

 (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

7/20/12

3-Month

0.12%

0.01%

0.09%

6-Month

0.18%

0.06%

0.14%

2 Year

0.59%

0.24%

0.20%

5 Year

2.01%

0.83%

0.57%

7 Year

 

 

0.93%

10 Year

3.29%

1.88%

1.46%

                                                  

Key Rates (in Percentages)

 

Current

1 Mo. Prior

3 Mo. Prior

6 Mo. Prior

1 Yr. Prior

Fed Funds Rate

0.14

0.17

0.13

0.08

0.09

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

8.20

8.20

8.20

8.50

9.10

1-Month Libor

0.25

0.24

0.24

0.28

0.19

3-Month Libor

0.45

0.47

0.47

0.56

0.25