Where are interest rates going next? Up, obviously, but for planning purposes, it is important to hear from experts regarding how much and when the changes are expected. The following matrix includes information from J.P. Morgan, Barclays Capital, Bank of America, and Morgan Stanley.

Rates

4Q 2013

1Q 2014

2Q 2014

3Q 2014

2-year Treasuries

0.43%

0.52%

0.66%

0.83%

5-year Treasuries

1.61%

1.88%

2.14%

2.38%

10-year Treasuries

2.81%

3.015

3.25%

3.48%

30-year Treasuries

3.78%

3.94%

4.11%

4.26%

Rates of Return Remain Attractive to Institutional Investors

The National Council of Real Estate Investment Fiduciaries (NCREIF) recently released its property performance index for the third quarter of 2013. The NCREIF Property Index is composed of 7,027 properties with an estimated market value of $343.6 billion. Details regarding the composition of the index can be found at www.ncreif.org.

For the quarter ended September 30, the index showed a return of 2.59 percent, composed of property income equal to 1.37 percent and property value appreciation of 1.22 percent. On a trailing 12-month basis, the index’s return was 11.0 percent, composed of property income of 5.7 percent and property appreciation of 5.1 percent. Whether quarter-over-quarter or year-over-year, these rates of return remain very attractive to both domestic and offshore institutional investors and may provide a floor for core property pricing in the 24-hour gateway markets.

Monday’s Numbers

The Trepp survey for the period ended November 8 showed spreads widening a basis point here and there, as the market focus has turned to closing deals by year-end. Absent an “event” of some kind, spreads can be expected to stay within a narrow band through year-end 2013.

Asking Spreads over U.S. 10-Year Treasury Bonds, in Basis Points
(10-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

10/18/13

10/25/13

11/1/13

11/8/13

Office

342

214

210

210

181

173

181

183

Retail

326

207

207

192

178

168

174

175

Multifamily

318

188

202

182

168

163

159

162

Industrial

333

201

205

191

171

166

162

164

Average spread

330

203

205

194

175

168

169

171

10-year Treasury

3.83%

3.29%

.88%

1.64%

2.60%

2.70%

2.65%

2.77%

The most recent Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads, dated November 4, showed spreads coming in 15 basis points during the survey period.

Applying an average spread of 200 basis points, borrowers are looking at all-in costs of 4.75 to 5.0 percent for fixed-rate mortgages with a 70 to 75 percent loan-to-value ratio. These spreads must be attractive to both borrowers and lenders: the Mortgage Bankers Association recently reported third-quarter commercial/multifamily origination volume was up 29 percent year-over-year. The increase in origination volume was led by commercial mortgage–backed securities, which saw volume increase 105 percent year-over-year, followed by life insurance companies with a 72 percent increase year-over-year. 

10-Year Fixed-Rate Commercial Real Estate Mortgages (as of November 4)

Property

Maximum
loan-to-value

Class A

Class B

Multifamily (agency)

75%– 80%

T +195

T +200

Multifamily (nonagency)

70%–75%

T +200

T +210

Anchored retail

70%–75%

T +205

T +220

Strip center

65%–70%

T +225

T +240

Distribution/warehouse

65%–70%

T +200

 T +215

R&D/flex/industrial

65%–70%

T +215

T +235

Office

65%–75%

T +195

T +215

Full-service hotel

55%–65%

T +250

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: +21.81%
Standard & Poor’s 500 Stock Index: +26.08%
NASDAQ composite: +32.01%
Russell 2000: +31.42%
Morgan Stanley U.S. REIT index: +2.76%

 

U.S. Treasury Yields

12/31/11

12/31/12

11/15/13

3-month

0.01%

0.08%

0.08%

6-month

0.06%

0.12%

0.10%

2-year

0.24%

0.27%

0.31%

5-year

0.83%

0.76%

1.36%

7-year

1.35%

1.25%

2.06%

10-year

1.88%

1.86%

2.71%

Key Rates (Percentage)

Current

1 year ago

Federal funds rate

0.10

0.17

Federal Reserve target rate

0.25

0.25

Prime rate

3.25

3.25

U.S. unemployment rate

7.30

8.50

1-month LIBOR

0.17

0.21

3-month LIBOR

0.24

0.31