Two new retail platforms were described in the Wednesday, October 9, 2013, issue of Standard & Poor’s Structured Finance Research Update. Companies are continuously experimenting with alternative and hopefully faster ways of selling goods as the e-world continues its battle with bricks-and-mortar retailers. ShopThis, a new e-platform from MasterCard and Condé Nast, allows for the instant purchase of an item described in an article or shown in an advertisement by simply clicking on an icon. Paydiant has developed technology that scans codes from television screens. And lastly, Peapod has developed a program that allows customers to order groceries by simply scanning barcodes.

Issuance of Commercial Mortgage–Backed Securities Reaches $60 billion

CMBS issuance passed the $60 billion mark as of the end of the third quarter and is on pace to reach $80 billion by year-end and predicted to reach $100 billion in 2014.

Capitalization Rates Remain Unchanged through the End of the Third Quarter 

According to the Real Estate Research Corporation’s quarterly survey of institutional investors, capitalization rates remained basically unchanged through the end of the third quarter, with average cap rates declining 8 basis points (or 8 one-hundredths of 1.00 percent).

Capitalization rates declined for the following sectors: multifamily (-0.20 percent); suburban office (-0.10 percent); neighborhood shopping centers (-0.20 percent); and all industrial formats (industrial, -0.20 percent; research and development, -0.10 percent; and flex, -0.40 percent).

Capitalization rates increased for regional malls (+0.10 percent) and power centers (+0.20 percent) as well as hospitality (+0.10 percent).

Capitalization rates for central business district (CBD) office buildings were unchanged.

The Trepp survey for the period ending October 4, 2013, showed the market treading water, waiting for some direction as to the solution to the issues being argued in Congress and with the president. So take a deep breath and let’s wait and see where the futures markets as well as the Asian markets open on Monday evening.

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

9/13/13

9/20/13

9/27/13

10/04/13

Office

342

214

210

210

178

176

174

175

Retail

326

207

207

192

168

163

163

167

Multifamily

318

188

202

182

160

159

158

164

Industrial

333

201

205

191

163

163

161

167

Average spread

330

203

205

194

163

164

164

168

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.88%

2.75%

2.64%

2.70%

The most recent Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads dated September 9, 2013, showed spreads coming in 5 basis points during the survey period.

We expect the balance of the year to play out as follows: with interest rates expected to increase in the near future, borrowers will focus on closing committed deals as soon as possible in order to lock in today’s cheap financing. On the other hand, you will see lenders trying to dig in their heels and not get locked in to subpar returns for up to a ten-year holding. All-in costs should range in the 4.50 to 5.00 percent area. 

Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of September 13, 2013)

Property

Maximum
loan-to-value

Class A

Class B

Multifamily (agency)

75–80%

T +205

T +215

Multifamily (nonagency)

70-75%

T +215

T +220

Anchored retail

70–75%

T +220

T +235

Strip center

65–70%

T +240

T +255

Distribution/warehouse

65–70%

T +220

 T +235

R&D/flex/industrial

65–70%

T +235

T +255

Office

65–75%

T +210

T +230

Full-service hotel

55–65%

T +270

T +295

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

 

Year-to-Date Public Equity Capital Markets

DJIA (1): +16.28%
S&P 500 (2): +19.42%
NASDAQ (3): +25.58%
Russell 2000 (4): +27.66%
Morgan Stanley U.S. REIT (5): +1.46%

(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

12/31/11

12/31/12

10/11/13

3-Month

0.01%

0.08%

0.08%

6-Month

0.06%

0.12%

0.07%

2-Year

0.24%

0.27%

0.35%

5-Year

0.83%

0.76%

1.42%

7-Year

1.35%

1.25%

2.07%

10-Year

1.88%

1.86%

2.70%

 

Key Rates (in Percentages)

Current

One year prior

Federal funds rate

0.09

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

0.22

3-Month LIBOR

0.24

0.35