This past Wednesday, the hottest ticket in New York City was not on Broadway or for the baseball game. Rather, it was for the luncheon meeting of the Economics Club of New York, which had Janet Yellen, chair of the Federal Reserve Board, as its featured speaker. The sixth floor and balcony seventh floor of the Marriott Hotel were packed with people who wanted to hear her as they looked for guidance from the tone of her speech to those who studied her body language in search of a directional clue. I just listened and tried to sort out what she was saying in what was one of her first major speeches since she became chair of the Fed. (Watch a video of the speech at C-SPAN.org)

As the speech was widely covered by the press, I’m only going to hit what I thought were the key takeaways:

  • She says what she means; the remarks were clear and direct, without guile. It would be hard to see how anyone could walk out of the room not knowing what the Fed’s strategy is. Of course, the financial markets lost control of themselves a few weeks ago as they searched for a definition of the word “tapering” that mirrored their expectations rather than the dictionary’s definition.
  • The Fed is watching both inflation and deflation “like a hawk” and appears ready to act decisively if necessary.
  • Interest rates will remain “very low” until the economy is on a more secure footing. Attendees seemed to read this as low rates until 2016, or possibly longer if the Fed is not satisfied with the path of the recovery.
  • “A robust and healthy job market” still appears to be two years away.

“The Poetry of the Trading Floor, Going Beyond Bears and Bulls”

The above-titled article appeared in Monday, April 14, 2014’s New York Times. It has nothing to do with the real estate business or the real estate capital markets. What it does do is explore the taxonomy and origins of common and not-so-common words that have crept into our finance vocabulary such as nest egg, bulls and bears, mortgage, PIGS (Portugal, Ireland, Greece, and Spain), FILTH (failed in London, try Hong Kong), and the like.

Monday’s Numbers

Due to vacation scheduling, the Trepp survey was not conducted last week; the survey will return in next week’s issue of “Monday’s Numbers.”

Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points
(Ten-year commercial and multifamily mortgage loans
for properties with 50% to 59% loan-to-value ratios)

12/31/09

12/31/10

12/31/11

12/31/12

12/31/13

4/4/14

Month earlier

 Office

342

214

210

210

162

153

152

 Retail

326

207

207

192

160

143

143

 Multifamily

318

188

202

182

157

136

137

 Industrial

333

201

205

191

159

140

140

 Average spread

330

203

205

194

160

143

143

 10-year Treasury

3.83%

3.29%

0.88%

1.64%

3.04%

2.74%

2.70%

The Cushman & Wakefield (C&W) Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads, dated April 3, 2014, showed spreads for Class A property coming in 5 to 10 basis points, with spreads for Class B property coming in as much as 15 basis points as the market at all levels becomes increasingly competitive with lenders aggressively reducing spreads to win business. For now, advantage to the borrower.

In its comments accompanying the survey, C&W noted the following:

  • It was recently reported that private real estate funds have in excess of $100 billion of “dry powder” focused on acquisitions of property located in North America. Assuming 50 percent leverage, that’s “buying power” equal to $200 billion, or 56 percent of 2013’s estimated total real estate sales transactions.
  • Spreads for newly issued commercial mortgage–backed securities (CMBS) have remained stable to slightly tighter since January 1, 2014, with super-senior bonds trading inside 90 basis points and BBB-rated paper stable at swaps plus 345 to 395 basis points. Translated from financial-speak, this means that spreads to borrowers continue to trend down, indicating that originators are finding it necessary to lower their profit to win business. Advantage to the borrower again.

 Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of April 3, 2014)

Property

Maximum
loan-to-value

Class A

Class B

 Multifamily (agency)

75–80%

T +165

T +170

 Multifamily (nonagency)

70–75%

T +170

T +180

 Anchored retail

70–75%

T +195

T +205

 Strip center

65–70%

T +210

T +220

 Distribution/warehouse

65–70%

T +195

T +205

 R&D/flex/industrial

65–70%

T +205

T +215

 Office

65–75%

T +190

T +200

 Full-service hotel

55–65%

T +255

T +275

 Debt-service-coverage ratio assumed to be greater than 1.35 to 1.

 

Year-to-Date Public Equity Capital Markets

Dow Jones Industrial Average: –1.01%

Standard & Poor’s 500 Stock Index: +0.89%

NASD Composite Index (NASDAQ): –1.94%

Russell 2000: –2.21%

Morgan Stanley U.S. REIT Index: +8.02%

 

Year-to-Date Global CMBS Issuance
(in $ billions as of 4/11/14)

2014

2013

U.S.

$20.5

$27.0

Non-U.S.

0.5

2.5

Total

$201.1

$29.4

Source: Commercial Mortgage Alert.

 

Year-to-Date Public U.S. Treasury Yields

U.S. Treasury Yields

12/31/12

12/31/13

4/20/14

 3-month

0.08%

0.07%

0.03%

 6-month

0.12%

0.10%

0.05%

 2-year

0.27%

0.38%

0.40%

 5-year

0.76%

1.75%

1.73%

 7-year

1.25%

2.45%

2.24%

 10-year

1.86%

3.04%

2.72%