One Uncertainty Down, Many Remain

Now that the U.S. presidential election is behind us, we turn our attention to the upcoming fiscal cliff, the continuing austerity crises in Europe, regime change in China, the prospects for additional civil conflict in the Middle East, etc.

This is not the forum for dealing with these complex issues; what we are trying to do is remind you that it is time to take a deep breath, marshal your resources, and get on with it. Tempus fugit: you have deals to close before yearend.

REITs Did Not Shine in October

According to the FTSE NAREIT Equity REIT Index, equity REITs posted a total return of -0.84 percent for October 2012; in September, the equity REIT index posted a total return of -1.78 percent.

The best performing REIT sectors in October were infrastructure (+5.47 percent) and timber (+3.08 percent); the poorest performing REIT sectors were hotels (-8.13 percent) and diversified (-1.65 percent).

Capitalization Rate Survey Results

According to the Real Estate Research Corporation’s most recent survey of institutional investors and advisors, capitalization rates continued to decrease, subject to two exceptions, reflecting the continuing high demand for income-producing real estate investments. 

The two exceptions were regional malls where capitalization rates were reported to have widened 40 basis points (which seems an extreme move) and lodging which widened 30 basis points which while extreme as to amount is reasonable given the volatile nature of the lodging industry. We have a call in to RERC and will report back.

Property Sector

2Q 2012

3Q 2012

Increase (Decrease)

 

Multifamily

5.60%

5.40%

(0.20%)

Office-CBD

6.20%

6.20%

Office-Suburban

7.20%

7.20%

Retail-Mall

6.40%

6.80%

+0.40%

Retail-Neighborhood

7.00%

6.70%

(0.30%)

Retail-Power

7.30%

7.20%

(0.10%)

Industrial-Warehouse

6.70%

6.50%

(0.20%)

Industrial-R & D

7.50%

7.40%

(0.10%)

Industrial-Flex

7.90%

7.80%

(0.10%)

Lodging

8.00%

8.30%

+0.30%

 

 

 

All Property

6.96%

6.95%

(0.01%)

Monday’s Numbers

According to its most recent survey, Trepp reported spreads were unchanged week-over-week, which likely defines pricing for the balance of the year for the most creditworthy borrowers seeking to mortgage core properties located in gateway markets; if that’s not you and your property, add a 50 to 100 basis point premium (depending on loan term), sign the application, and close the deal. Rates will likely not get any lower.

All-in-all, mortgage rates remain incredibly attractive and seem likely to stay at this level until this year’s allocation is completely exhausted (or the loan officers become completely exhausted).

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

11/2

Week Earlier

Month Earlier

Office

342

214

210

220

221

225

Retail

326

207

207

207

205

206

Multifamily

318

188

202

198

198

208

Industrial

333

201

205

206

206

217

 

Average Spread

330

203

205

208

208

214

 

10-Year Treasury

3.83%

3.29%

1.88%

1.70%

1.69%

1.62%

The Cushman & Wakefield Equity, Debt, and Structured Finance Commercial Mortgage Spread monthly survey of commercial mortgage spreads showed spreads for 10-year, fixed rate mortgages, coming in approximately 15 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

7/26/12

9/3/12

9/27/12

11/6/12

Multifamily – Non-Agency

+270

+245

+240

+235

+220

Multifamily – Agency

+280

+225

+225

+210

+210

Regional Mall

+280

+295

+290

+285

+270

Grocery Anchored

+280

+290

+285

+280

+265

Strip and Power Centers

 

+315

+310

+305

+295

Multi-Tenant Industrial

+270

+300

+295

+290

+270

CBD Office

+280

+295

+285

+280

+250

Suburban Office

+300

+315

+305

+300

+270

Full-Service Hotel

+320

+360

+360

+355

+340

Limited-Service Hotel

+400

+370

+370

+365

+350

5-Year Treasury

2.60%

0.57%

0.68%

0.64%

0.71%

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

7/26/12

9/3/12

9/27/12

11/6/12

Multifamily – Non-Agency

+190

+220

+210

+205

+190

Multifamily – Agency

+200

+210

+210

+195

+180

Regional Mall

+175

+235

+230

+225

+210

Grocery Anchor

+190

+230

+225

+220

+205

Strip and Power Centers

 

+250

+245

+240

+225

Multi-Tenant Industrial

+190

+255

+250

+245

+225

CBD Office

+180

+245

+235

+230

+200

Suburban Office

+190

+265

+260

+255

+225

Full-Service Hotel

+290

+290

+290

+285

+270

Limited-Service Hotel

+330

+310

+310

+305

+390

10-Year Treasury

3.47%

1.42%

1.64%

1.64%

1.71%

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

7/26/12

9/3/12

9/27/12

11/6/12

Multifamily – Non-Agency

+250-300

+200-260

+200-260

+200-260

+180-250

Multifamily- Agency

+300

+220-265

+220-265

+220-265

+200-260

Regional Mall

+275-300

+210-275

+210-275

+210-275

+210-275

Grocery Anchored

+275-300

+210-275

+210-275

+210-275

+210-275

Strip and Power Centers

 

+225-300

+225-300

+225-300

+225-300

Multi-Tenant Industrial

+250-350

+230-305

+230-305

+230-305

+230-305

CBD Office

+225-300

+225-300

+225-300

+225-300

+180-250

Suburban Office

+250-350

+250-325

+250-325

+250-325

+250-325

Full-Service Hotel

+300-450

+275-400

+275-400

+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%

0.21%

3-Month LIBOR

0.30%

0.46%

0.43%

0.43%

0.31%

* A dash (-) indicates a range.

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

Year-to-Date Public Equity Capital Markets

DJIA (1): +4.89%
S&P 500 (2): +9.72%
NASDAQ (3): +11.50%
Russell 2000 (4):+7.31%
Morgan Stanley U.S. REIT (5):+9.39%

 (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

11/10/12

3-Month

0.12%

0.01%

0.09%

6-Month

0.18%

0.06%

0.14%

2 Year

0.59%

0.24%

0.26%

5 Year

2.01%

0.83%

0.64%

7 Year

 

 

1.03%

10 Year

3.29%

1.88%

1.61%

                                           

Key Rates (in Percentages)

 

Current

1 Mo. Prior

3 Mo. Prior

6 Mo. Prior

1 Yr. Prior

Fed Funds Rate

0.17

0.17

0.06

0.15

0.08

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

7.90

7.80

8.30

8.10

8.90

1-Month Libor

0.21

0.21

0.24

0.24

0.25

3-Month Libor

0.31

0.25

0.44

0.47

0.43