Last week, the Real Estate Roundtable announced the results of its third-quarter 2013 Real Estate Roundtable Sentiment Index (“Q3 Index”), which measures real estate industry executives’ confidence in the real estate environment, including current conditions as well as the future outlook on three topics: overall real estate conditions, access to capital markets, and real estate asset pricing.
Top-line findings from the survey, which is available at www.rer.org, included the following:
- The Q3 Index remains on a flat trajectory; participants note continued improvement in real estate fundamentals, but remain cautious due to the slow pace of economic recovery.
- New construction and an increased tolerance for risk suggest optimism beyond the core “gateway” markets and multifamily sector, although bifurcation remains.
- In the near future, rising interest rates could undermine improvements in net operating income—potentially putting renewed downward pressure on asset values.
- For now, the strong availability of capital (increasingly flowing to riskier transactions) is helping to offset the recent run-up in long-term interest rates.
Aon Risk Survey
Aon, a global provider of risk management, insurance, and reinsurance brokerage, surveys its clients annually about the top ten risks they face today as well as their projected top ten future risks. The results of its most recent survey follow:
“Where Are We?” | “Where Are We Going?” |
Economic slowdown/slow recovery | Economic slowdown/slow recovery |
Regulatory/legislative changes | Regulatory/legislative changes |
Increasing competition | Increasing competition |
Damage to reputation/brand | Failure to innovate/meet customer needs |
Failure to attract/retain top talent | Failure to attract or retain top talent |
Failure to innovate/meet customer needs | Political risk/uncertainties |
Business interruption | Commodity price risk |
Commodity price risk | Damage to reputation/brand |
Cash flow/liquidity risk | Weather and natural disasters |
Political risk/uncertainties | Cash flow/liquidity risk |
The report noted the following mistakes made and lessons learned:
- Do not lose focus of the basics.
- Risk management involves both compliance with regulation as well as continuing analysis of your place in the market.
- Plan now for the future (and new risks), i.e., did any of us know what cyber risk was two years ago?
- Do not underestimate the complexity of business interruption; in addition to the time element (how long), there is the complexity associated with “restocking” the shelves.
Next Stop: Europe
A lack of transactional opportunities in the United States has caused a number of opportunistic investors including hedge funds, sovereign wealth funds, and the like to start to focus their attention on the U.K., Ireland, Spain, and Germany, where opportunities are increasingly available through asset sales sponsored by governmental agencies, or directly by owners such as financial institutions.
According to Cushman & Wakefield (C&W), transaction velocity is increasing year over year, with real estate loan sales expected to reach €30 billion (US$39.7 billion) by year-end 2013. In fact, just as investors turned from core markets to secondary and tertiary markets when the number of investment opportunities in core markets started to dwindle, C&W reports that investors are looking at deals in the Netherlands, Italy, Finland, and France.
To date, the majority of closed transactions have been commercial real estate loan sales (73 percent), followed by sales of real estate owned (REO) (19 percent), commercial mortgage–backed securities (CMBS) asset sales (6 percent), and residential loans (2 percent).
Federico Montero, EMEA corporate finance partner at Cushman & Wakefield, said: “We are seeing a wave of new investors looking to capitalize on the opportunities presented by both the deleveraging banks and the newly formed European asset management agencies that are becoming increasingly active. The next six months is certainly going to be very busy.”
Monday’s Numbers
The Trepp survey for the period ending July 26 showed average spreads narrowing as much as 10 basis points with 10-Year U.S. Treasury bonds coming in 8 basis points. Net, no change week over week as both borrowers and lenders cautiously approach the debt markets, waiting for a sign on which to place a directional bet. Absent some event risk, most lenders think the markets will trade in this narrow range through Labor Day.
Asking Spreads over U.S. 10-Year Treasury Bonds in Basis Points | ||||||||
12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 7/5/13 | 7/12/13 | 7/19/13 | 7/26/13 | |
Office | 342 | 214 | 210 | 210 | 179 | 178 | 184 | 176 |
Retail | 326 | 207 | 207 | 192 | 169 | 164 | 168 | 158 |
Multifamily | 318 | 188 | 202 | 182 | 158 | 160 | 161 | 154 |
Industrial | 333 | 201 | 205 | 191 | 163 | 163 | 168 | 161 |
Average spread | 330 | 203 | 205 | 194 | 167 | 160 | 170 | 162 |
10-Year Treasury | 3.83% | 3.29% | 1.88% | 1.64% | 2.73% | 2.52% | 2.50% | 2.58% |
The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads was updated midweek, showing spreads widening +/-30 basis points over the past 45 days.
Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of June 15, 2013) | |||
Property | Maximum | Class A | Class B |
Multifamily (agency) | 75–80% | T +210 | T +215 |
Multifamily (nonagency) | 70–75% | T +215 | T +220 |
Anchored retail | 70–75% | T +240 | T +250 |
Strip center | 65–70% | T +260 | T +270 |
Distribution/warehouse | 65–70% | T +240 | T +250 |
R&D/flex/industrial | 65–70% | T +255 | T +270 |
Office | 65–75% | T +230 | T +245 |
Full-service hotel | 55–65% | T +295 | T +320 |
Debt-service-coverage ratio assumed to be greater than 1.35 to 1. |
Year-to-Date Public Equity Capital Markets
DJIA (1): +19.49%
S&P 500 (2):+19.88%
NASDAQ (3): +22.19%
Russell 2000 (4): +24.78%
Morgan Stanley U.S. REIT (5): +4.20%
(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 | 8/2/13 | |
3-Month | 0.01% | 0.08% | 0.04% |
6-Month | 0.06% | 0.12% | 0.07% |
2-Year | 0.24% | 0.27% | 0.30% |
5-Year | 0.83% | 0.76% | 1.36% |
7-Year | 1.35% | 1.25% | 2.01% |
10-Year | 1.88% | 1.86% | 2.63% |