• Commercial real estate fundamentals are starting to improve (or at least stabilize) in most markets.
  • Economic recovery? The U.S. is grinding it out.
  • Vacancy rates for all property sectors are beginning to decline…slowly; lack of development for the past five years (x-multifamily) has helped; can you imagine what it would be like if we had overbuilt as in prior periods?
  • Single-family market has reached the corner; maybe even turned it; it’s a market-by-market thing.
  • Commercial real estate remains an attractive investment on a relative value basis; “we’re the cleanest dirty shirt in the closet.”
  • We are somewhere between uncertainty and extreme uncertainty.
  • China’s economic growth is slowing; European economies and capital markets remain in turmoil; the U.S. is facing the fiscal cliff; how do you plan in such an uncertain environment?
  • Acquisitions in the core, gateway, 24-hour cities are “priced to perfection” for the seller; for the buyer, they may turn out to have been “priced to disappoint.”
  • Chasing yield is the new Olympic sport.
  • Increasing attention is being focused on secondary and tertiary markets as the core markets are “just too competitive and way too pricey.”
  • While transaction activity is increasing, there are no bargains out there.
  • It’s a seller’s market; it’s a holder’s market too.
  • Interest rates will eventually increase, but I trust the Fed and think we’re safe through 2015.
  • Industry will continue to shrink in size, reflecting less in terms of sales, leases, and financing and little, if any, new construction (excluding-multifamily); a smaller industry should be more profitable for those who survive.
  • Sources of equity capital include the usual suspects: foreign investors; pension funds; opportunity funds; local sharpshooters; public REITs and private REITs—each of whom is expected to increase its allocation to real estate compared to 2012.
  • Capitalization rates will continue to decline in all markets as investors chase yield; the trick is knowing when they have declined dangerously.
  • Sea changes abound: reurbanization; e-commerce’s growth; Gen Y, and technology are game changers; distribution links and channels are  re-thought.
  • Availability of debt capital is expected to be greater in 2013 than in 2012; lenders will continue to play extend and pretend until regulators say otherwise.
  • Should I be a buyer at low capitalization rates or a seller at low capitalization rates with no place to re-invest the proceeds?
  • Refinancing (in general) is a continuing concern; refinancing of maturing CMBS loans is a financial hazard.
  • Everybody says equity and debt underwriting standards will be stringent; I say, let them prove it.
  • CMBS need to get their house in order before investors lose confidence again.
  • REITs have put their house in order and have plenty of dry powder to fund acquisitions and development.
  • Foreign investors and pension funds will remain active in U.S. real estate in 2013; we’re a global safe haven and a cash flow generator. 

Monday’s Numbers 

The Trepp, LLC survey showed commercial mortgage spreads coming unchanged during the survey period. And as we said previously:  Drop whatever you are doing and refinance something; how can it get any better than this?

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

10/12

Week Earlier

Month Earlier

Office

342

214

210

225

225

230

Retail

326

207

207

215

215

222

Multifamily

318

188

202

210

210

214

Industrial

333

201

205

216

216

221

Average Spread

330

203

205

214

217

222

10-Year Treasury

3.83%

3.29%

1.88%

1.70%

1.74%

1.65%

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 a uniform 5 basis points across all property sectors and terms 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

6/28/12

7/26/12

9/3/12

9/27/12

Multifamily – Non-Agency

+270

+245

+245

+240

+235

Multifamily – Agency

+280

+225

+225

+225

+210

Regional Mall

+280

+300

+295

+290

+285

Grocery Anchored

+280

+295

+290

+285

+280

Strip and Power Centers

 

+320

+315

+310

+305

Multi-Tenant Industrial

+270

+305

+300

+295

+290

CBD Office

+280

+300

+295

+285

+280

Suburban Office

+300

+315

+315

+305

+300

Full-Service Hotel

+320

+360

+360

+360

+355

Limited-Service Hotel

+400

+370

+370

+370

+365

5-Year Treasury

2.60%

0.69%

0.57%

0.68%

0.64%

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

6/28/12

7/26/12

9/3/12

9/27/12

Multifamily – Non-Agency

+190

+220

+220

+210

+205

Multifamily – Agency

+200

+200

+210

+210

+195

Regional Mall

+175

+245

+235

+230

+225

Grocery Anchor

+190

+235

+230

+225

+220

Strip and Power Centers

 

+255

+250

+245

+240

Multi-Tenant Industrial

+190

+260

+255

+250

+245

CBD Office

+180

+250

+245

+235

+230

Suburban Office

+190

+265

+265

+260

+255

Full-Service Hotel

+290

+290

+290

+290

+285

Limited-Service Hotel

+330

+310

+310

+310

+305

10-Year Treasury

3.47%

1.58%

1.42%

1.64%

1.64%

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

6/28/12

7/26/12

9/3/12

9/27/12

Multifamily – Non-Agency

+250-300

+200-260

+200-260

+200-260

+200-260

Multifamily- Agency

+300

+220-265

+220-265

+220-265

+220-265

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

+235-305

+230-305

+230-305

+230-305

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

+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%

0.24%

3-Month LIBOR

0.30%

0.47%

0.46%

0.43%

0.43%

* A dash (-) indicates a range.

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

Year-to-Date Public Equity Capital Markets 

DJIA (1): +9.22%
S & P 500 (2): +13.96%
NASDAQ (3): +15.37%
Russell 2000 (4):+10.82%
Morgan Stanley U.S. REIT (5):+12.82%

 (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

10/20/12

3-Month

0.12%

0.01%

0.09%

6-Month

0.18%

0.06%

0.14%

2 Year

0.59%

0.24%

0.29%

5 Year

2.01%

0.83%

0.7%

7 Year

 

 

1.19%

10 Year

3.29%

1.88%

1.76%

                    

Key Rates (in Percentages)

 

Current

1 Mo. Prior

3 Mo. Prior

6 Mo. Prior

1 Yr. Prior

Fed Funds Rate

0.17

0.16

0.10

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

7.80

8.10

8.20

8.20

9.00

1-Month Libor

0.21

0.22

0.25

0.24

0.24

3-Month Libor

0.32

0.38

0.45

0.47

0.41