U.S. job growth was reported to be 169,000 in August, which equates to an unemployment rate of 7.3 percent; job growth has averaged 148,000 per month for the past three months. All in all, the jobs numbers do not add a lot of directional clarity given all the things that are still on our plate, including Syria, U.S. budget talks, and the debt ceiling, among others.

Everyone wants to know when QE3 will “start to end” and tapering will begin; your guess is as good as ours. It appears that analysts are coalescing around a two-pronged strategy comprising a decrease in bond buying beginning after the Federal Reserve meeting at the end of September and a delay in rate increases until as late as 2015.

While the U.S. job numbers may have been nothing to write home about and economic growth has been modest, Europe and the emerging markets have even less to say for themselves as both the Bank of England and the European Central Bank reaffirmed their benchmark rates of 0.5 percent last week—clear evidence that their economies still have a long way to go.

Federal Reserve Beige Book Economic Survey

The Federal Reserve’s Beige Book Economic Survey for the period from early July through the end of August showed the economy improving at a moderate pace across all Federal Reserve districts and across all industries with the exception of agriculture.

Commercial real estate activity was reported as increasing across the districts as office vacancy rates declined and rents increased; an increase in construction of both multifamily residential and industrial buildings was noted.

U.S. CMBS Delinquency Rates Continue to Decline

According to Trepp LLC, delinquency rates for securitized commercial real estate declined for the third straight month, ending August 2013 at 8.38 percent—10 basis points below July’s reading and 175 basis points below a year ago. The August level is the lowest delinquency rate in three years.

In terms of delinquencies by property type, retail was the best performer with a 6.76 percent delinquency rate, followed by lodging (9.03 percent), office (9.60 percent), multifamily (11.14 percent), and industrial (11.51 percent).

The decline in delinquencies is clear evidence that real estate fundamentals are improving, thereby allowing borrowers to either service or refinance existing debt. And with an estimated $300 billion a year through 2017 requiring refinancing or payoff, the uptick in property performance is clearly welcome news.

Monday’s Numbers

While the Trepp survey for the period ending August 30, 2013, showed spreads narrowing 5.0 basis points, the midpoint for high-grade commercial real estate mortgages is now 4.5 percent, compared to 4.0 percent available during the earlier part of the year. Blame it on yields on ten-year U.S. bonds, which have increased more than 130 basis points since the beginning of the year.

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

7/19/13

7/26/13

8/2/13

8/30/13

Office

342

214

210

210

184

176

178

179

Retail

326

207

207

192

168

158

163

169

Multifamily

318

188

202

182

161

154

156

160

Industrial

333

201

205

191

168

161

162

164

Average spread

330

203

205

194

160

170

165

168

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.52%

2.50%

2.63%

2.93%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads, which was updated August 12, 2013, showed spreads coming in 10 +/- basis points during the survey period. 

Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of August 12, 2013)

Property

Maximum
loan-to-value

Class A

Class B

Multifamily (agency)

75–80%

T +210

T +220

Multifamily (nonagency)

70–75%

T +220

T +225

Anchored retail

70–75%

T +225

T +240

Strip center

65–70%

T +245

T +260

Distribution/warehouse

65–70%

T +225

 T +240

R&D/flex/industrial

65–70%

T +240

T +260

Office

65–75%

T +215

T +235

Full-service hotel

55–65%

T +275

T +300

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

 

Year-to-Date Public Equity Capital Markets

DJIA (1): +13.88%
S&P 500 (2): +16.05%
NASDAQ (3): +17.89%
Russell 2000 (4): +21.21%
Morgan Stanley U.S. REIT (5): -1.98%

(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

9/7/13

3-Month

0.01%

0.08%

0.02%

6-Month

0.06%

0.12%

0.05%

2-Year

0.24%

0.27%

0.45%

5-Year

0.83%

0.76%

1.76%

7-Year

1.35%

1.25%

2.38%

10-Year

1.88%

1.86%

2.93%

Key Rates (in Percentages)

Current

Year prior

Federal Funds rate

0.08

0.15

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

0.18

0.23

3-Month LIBOR

0.26

0.42