“Capitalization Rates [With One Exception] Decline Across All Property Sectors in Q1 2012”
According to the most recent survey by Real Estate Research Corporation (RERC), average capitalization rates continued to decline as more and more capital is invested in real estate. As the following chart indicates, RERC’s All Property average narrowed 14 basis points, from 7.19 percent to 7.05 percent.
Winners during the period included multifamily (down 10 basis points); central business district office (down 40 basis points); neighborhood retail (down 20 basis points); industrial-warehouse (down 10 basis points); and lodging (down 60 basis points). Four sectors—suburban office, malls, power centers, and research and development industrial—were neutral during the period while one sector—flex industrial—lost ground with spreads reported to have increased 10 basis points.
Is there a principal driver? Not that we can see. Rather, it appears the accumulation of a number of “positives”—hard asset versus volatile financial asset; higher current return on investment than financial assets; and positive leverage available in size, term , and rate to name a few. Our expectation is that this trend will continue for a while in response to investor appetites and requirements as well as in response to global financial market volatility and uncertainty.
Period | 1Q 2012 | 4Q 2011 | Increase/ |
All Property | 7.05% | 7.19% | (0.14%) |
Multifamily | 5.70% | 5.80% | (0.10%) |
Office-CBD | 6.30% | 6.70% | (0.40%) |
Office-Suburban | 7.60% | 7.60% | --- |
Retail-Mall | 6.50% | 6.50% | --- |
Retail-Neighborhood | 6.90% | 7.10% | (0.20%) |
Retail-Power | 7.20% | 7.20% | --- |
Industrial-Warehouse | 6.90% | 7.00% | (0.10%) |
Industrial-R & D | 7.70% | 7.70% | --- |
Industrial-Flex | 8.00% | 7.90% | +0.10% |
Lodging | 7.80% | 8.40% | (0.60%) |
The Trepp LLC survey showed spreads widening over the past two weeks in response to the yield on 10-year Treasury bonds which has narrowed 15+/- basis points. Lending spreads continue to move in a narrow range with overall cost attractive at all maturities and from a wide array of capital sources. Many lenders seem to have “drawn a line in the sand” relative to pricing with “floors” relatively common.
With floors skirting around 4.0 percent for the shortest maturity (5 years), financing mains attractive and very affordable.
Asking Spreads over U.S. Treasury Bonds in Basis Points | |||||
12/31/09 | 12/31/10 | 12/31/11 | 4/13 | Month Earlier | |
Office | 342 | 214 | 210 | 206 | 199 |
Retail | 326 | 207 | 207 | 195 | 189 |
Multifamily | 318 | 188 | 198 | 184 | 189 |
Industrial | 333 | 201 | 205 | 189 | 189 |
Average Spread | 330 | 203 | 205 | 194 | 192 |
10-Year Treasury | 3.83% | 3.29% | 1.88% | 2.05% | 2.21% |
Over the past month, the Cushman & Wakefield Sonnenblick-Goldman Survey narrowed, with 10-year rates improving as much as 40 basis points for some property sectors.
Property Type | Mid-Point of Fixed Rate Commercial Mortgage | ||||
12/31/10 | 1/5/12 | 1/26/12 | 2/28/12 | 3/28/12 | |
Multifamily - Non-Agency | +270 | +245 | +240 | +240 | +230 |
Multifamily – Agency | +280 | +255 | +245 | +210 | +195 |
Regional Mall | +280 | +300 | +300 | +300 | +275 |
Grocery Anchored | +280 | +295 | +295 | +290 | +270 |
Strip and Power Centers |
| +320 | +320 | +315 | +295 |
Multi-Tenant Industrial | +270 | +305 | +310 | +310 | +285 |
CBD Office | +280 | +310 | +310 | +295 | +270 |
Suburban Office | +300 | +320 | +320 | +310 | +290 |
Full-Service Hotel | +320 | +350 | +350 | +350 | +325 |
Limited-Service Hotel | +400 | +360 | +360 | +360 | +335 |
5-Year Treasury | 2.60% | 0.89% | 0.78% | 0.83% | 1.03% |
Source: Cushman & Wakefield Sonnenblick Goldman. | |||||
Property Type | Mid-Point of Fixed Rate Commercial Mortgage | ||||
12/31/10 | 1/5/12 | 1/26/12 | 2/28/12 | 3/28/12 | |
Multifamily - Non-Agency | +190 | +205 | +210 | +210 | +200 |
Multifamily – Agency | +200 | +200 | +205 | +180 | +165 |
Regional Mall | +175 | +245 | +245 | +235 | +275 |
Grocery Anchor | +190 | +240 | +240 | +230 | +270 |
Strip and Power Centers |
| +255 | +255 | +250 | +290 |
Multi-Tenant Industrial | +190 | +245 | +255 | +250 | +280 |
CBD Office | +180 | +250 | +240 | +320 | +270 |
Suburban Office | +190 | +265 | +260 | +250 | +290 |
Full-Service Hotel | +290 | +300 | +290 | +290 | +325 |
Limited-Service Hotel | +330 | +310 | +315 | +315 | +345 |
10-Year Treasury | 3.47% | 2.00% | 1.97% | 1.90% | 2.21% |
Source: Cushman & Wakefield Sonnenblick Goldman. | |||||
Property Type | Mid-Point of Floating-Rate Commercial Mortgage | ||||
12/31/10 | 1/5/12 | 1/26/12 | 2/28/12 | 3/28/12 | |
Multifamily – Non-Agency | +250-300 | +200-250 | +200-250 | +200-250 | +200-250 |
Multifamily- Agency | +300 | +220-265 | +220-265 | +220-265 | +220-265 |
Regional Mall | +275-300 | +250-350 | +210-265 | +200-265 | +200-265 |
Grocery Anchored | +275-300 | +240-325 | +200-275 | +200-275 | +200-275 |
Strip and Power Centers |
| +250-350 | +225-300 | +225-300 | +225-300 |
Multi-Tenant Industrial | +250-350 | +270-350 | +225-305 | +225-305 | +225-305 |
CBD Office | +225-300 | +275-350 | +225-300 | +225-300 | +225-300 |
Suburban Office | +250-350 | +300-350 | +250-325 | +250-325 | +250-325 |
Full-Service Hotel | +300-450 | +375-475 | +350-425 | +275-400 | +275-400 |
Limited-Service Hotel | +450-600 | +375-550 | +400-500 | +350-550 | +325-450 |
1-Month LIBOR | 0.26% | 0.30% | 0.27% | 0.24% | 0.24% |
3-Month LIBOR | 0.30% | 0.58% | 0.55% | 0.49% | 0.47% |
A dash (-) indicates a range. | |||||
Source: Cushman & Wakefield Sonnenblick Goldman. | |||||
Year-to-Date Public Equity Capital Markets
DJIA (1): +6.64%
S & P 500 (2): +9.62%
NASDAQ (3): +15.17%
Russell 2000 (4):+8.51%
Morgan Stanley U.S. REIT (5):+10.31%
_____
(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 | |||
12/31/10 | 12/31/11 | 4/21/12 | |
3-Month | 0.12% | 0.01% | 0.07% |
6-Month | 0.18% | 0.06% | 0.12% |
2 Year | 0.59% | 0.24% | 0.26% |
5 Year | 2.01% | 0.83% | 0.84% |
7 Year |
|
| 1.36% |
10 Year | 3.29% | 1.88% | 1.96% |
Key Rates (in Percentages) | |||||
| Current | 1 Mo. Prior | 3 Mo. Prior | 6 Mo. Prior | 1 Yr. Prior |
Fed Funds Rate | 0.13 | 0.15 | 0.08 | 0.08 | 0.11 |
Federal Reserve Target Rate | 0.25 | 0.25 | 0.25 | 0.25 | 0.25 |
Prime Rate | 3.25 | 3.25 | 3.25 | 3.25 | 3.25 |
US Unemployment Rate | 8.20 | 8.30 | 8.50 | 9.00 | 8.90 |
1-Month Libor | 0.24 | 0.24 | 0.28 | 0.24 | 0.21 |
3-Month Libor | 0.47 | 0.47 | 0.56 | 0.42 | 0.27 |
