“It’s the [Relative] Yield…Stupid!

In CMBS world, spreads—at the deal level, not your borrowing level [as yet]—are tightening, challenging levels we haven’t seen in practically forever. And so we ask ourselves what is going on—what is driving investors to invest in CMBS and receive skimpier and skimpier rates of return?

To us it appears obvious…it’s the “relative yield,” i.e. the positive yield advantage available in CMBS bonds as compared to alternative fixed-income securities. Institutional investors find themselves in an incredible bind: their cost to pay beneficiaries remains static while the yield on their fixed income investments [like everyone else’s] is declining due to the actions of the Federal Reserve and the various central banks designed to keep interest rates at today’s incredibly low levels.

So what’s an investor to do? Seek out alternatives like CMBS. Fortunately for investors, the positives seem to outweigh the concerns when one looks at the CMBS market. For example, according to a recent report from Fitch, the percentage of CMBS loans in Fitch-rated offerings that are delinquent by 60 days or in foreclosure declined from 8.48 percent in July to 8.39 percent in August. A year ago (August 31, 2011), the rate was 8.65 percent. And while modestly lower (less stringent) underwriting standards were noted in a recent offering—the offering included a pro-forma underwritten loan—the loan’s current income was sufficient to pay current debt service.

Hopefully, the next step will be that the decrease in spread will translate into lower interest costs for property owners borrowing in the CMBS space.

Monday’s Numbers

The Trepp, LLC survey showed commercial mortgage spreads widening a few basis points during the survey period as floor pricing continues in effect with rates in the 4.0 percent to 5.0 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

9/7/12

Week Earlier

Month Earlier

Office

342

214

210

234

233

245

Retail

326

207

207

227

221

232

Multifamily

318

188

198

216

210

225

Industrial

333

201

205

227

228

233

Average Spread

330

203

205

226

223

234

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

1.63%

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 five to 10 basis points.

Property Type

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

12/31/10

5/30/12

6/28/12

7/26/12

9/3/12

Multifamily – Non-Agency

+270

+250

+245

+245

+240

Multifamily – Agency

+280

+210

+225

+225

+225

Regional Mall

+280

+300

+300

+295

+290

Grocery Anchored

+280

+295

+295

+290

+285

Strip and Power Centers

 

+320

+320

+315

+310

Multi-Tenant Industrial

+270

+305

+305

+300

+295

CBD Office

+280

+295

+300

+295

+285

Suburban Office

+300

+315

+315

+315

+305

Full-Service Hotel

+320

+360

+360

+360

+360

Limited-Service Hotel

+400

+370

+370

+370

+370

5-Year Treasury

2.60%

0.69%

0.69%

0.57%

0.68%

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

5/30/12

6/28/12

7/26/12

9/3/12

Multifamily – Non-Agency

+190

+220

+220

+220

+210

Multifamily – Agency

+200

+190

+200

+210

+210

Regional Mall

+175

+245

+245

+235

+230

Grocery Anchor

+190

+230

+235

+230

+225

Strip and Power Centers

 

+260

+255

+250

+245

Multi-Tenant Industrial

+190

+260

+260

+255

+250

CBD Office

+180

+250

+250

+245

+235

Suburban Office

+190

+270

+265

+265

+260

Full-Service Hotel

+290

+295

+290

+290

+290

Limited-Service Hotel

+330

+320

+310

+310

+310

10-Year Treasury

3.47%

1.62%

1.58%

1.42%

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

5/30/12

6/28/12

7/26/12

9/3/12

Multifamily – Non-Agency

+250-300

+200-250

+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

+205-275

+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

+235-305

+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%

0.47%

0.46%

0.43%

* A dash (-) indicates a range.

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

Year-to-Date Public Equity Capital Markets

DJIA (1): +11.26%
S & P 500 (2): +16.55%
NASDAQ (3): +22.22%
Russell 2000 (4):+16.70%
Morgan Stanley U.S. REIT (5):+17.79%

(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

9/15/12

3-Month

0.12%

0.01%

0.10%

6-Month

0.18%

0.06%

0.12%

2 Year

0.59%

0.24%

0.25%

5 Year

2.01%

0.83%

0.71%

7 Year

 

 

1.23%

10 Year

3.29%

1.88%

1.87%

                                            

Key Rates (in Percentages)

 

Current

1 Mo. Prior

3 Mo. Prior

6 Mo. Prior

1 Yr. Prior

Fed Funds Rate

0.17

0.14

0.18

0.14

0.11

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

8.10

8.30

8.20

8.30

9.10

1-Month Libor

0.22

0.24

0.24

0.24

0.23

3-Month Libor

0.39

0.44

0.47

0.47

0.35