Last week was a rather quiet week for capital markets, as people’s focus turned from the financial markets to supplies from the hardware store and the supermarket.

Risk Alert—Take Heed 

According to a recent report from property data specialists Investment Property Databank (IPD), real estate investors worldwide are investing in real property without understanding the array of risks involved. The report noted that investors have not developed sufficiently robust risk management procedures nor have they fully integrated their real estate staffs into their wider asset allocation systems.

While an important comment in and of itself, IPD’s comment reflects the increasing number of commentators issuing “warnings” about an array of subjects from asset pricing to mortgage underwriting.

Risk Alert—Take Heed, Part II

Standard & Poor’s Ratings Services, in a recent issue of its Structured Finance Research Update, noted the following:

  • Issuance of commercial mortgage–backed securities is expected to increase in 2014 as compared to 2013, reaching $100 billion–plus.
  • One reason for the increase is that the number of firms originating loans for securitization now numbers 37, up from 27 a year ago.

With as many as 37 (and possibly more) “mouths to feed”, S & P’s worries that competition for deals is “likely to lead to deteriorating loan credit metrics” during the first half of 2014.

Monday’s Numbers

The Trepp survey for the period ending February 7, 2014, showed spreads meandering along, narrowing one week just a bit and widening just a little the next week. Last week was a narrowing just a bit week (–2 basis points).

Overall, pricing in the sub—5 percent range remains extremely attractive and, absent some unexpected event in the economic or capital markets, should remain the benchmark for most lenders.

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

2/7/14

Month earlier

 Office

342

214

210

210

162

152

156

 Retail

326

207

207

192

160

152

152

 Multifamily

318

188

202

182

157

147

148

 Industrial

333

201

205

191

159

149

150

 Average
spread

330

203

205

194

160

150

152

 10-year
Treasury

3.83%

3.29%

0.88%

1.64%

3.04%

2.71%

2.96%

The most recent Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads, dated February 11, 2014, showed spreads unchanged (anchored and strip centers, industrial sectors, and office) to 5 basis points wider (everyone else). 

 Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of January 8, 2014)

Property

Maximum
loan-to-value

Class A

Class B

 Multifamily (agency)

75–80%

T +180

T +185

 Multifamily (nonagency)

70–75%

T +185

T +195

 Anchored retail

70–75%

T +205

T +220

 Strip center

65–70%

T +220

T +235

 Distribution/warehouse

65–70%

T +195

T +210

 R&D/flex/industrial

65–70%

T +210

T +230

 Office

65–75%

T +195

T +215

 Full-service hotel

55–65%

T +255

T +280

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

 

Year-to-Date Public Equity Capital Markets

Dow Jones Industrial Average: –2.55%

Standard & Poor’s 500 Stock Index: –0.53%

NASD Composite Index (NASDAQ): +1.61%

Russell 2000: –1.24%

Morgan Stanley U.S. REIT Index: +4.57%

 

Year-to-Date Global CMBS Issuance
(in $ billions as of 2/14/14)

2014

2013

U.S.

$8.9

$13.5

Non-U.S.

0.0

1.0

Total

$8.9

$14.5

Source: Commercial Mortgage Alert.

 

U.S. Treasury Yields

12/31/12

12/31/13

2/7/14

 3-month

0.08%

0.07%

0.02%

 6-month

0.12%

0.10%

0.07%

 2-year

0.27%

0.38%

0.32%

 5-year

0.76%

1.75%

1.53%

 7-year

1.25%

2.45%

2.17%

 10-year

1.86%

3.04%

2.75%