Real Estate Research Corporation recently released its second-quarter 2013 survey of institutional participants in the commercial real estate market, the results of which are summarized below:
Investment Conditions
2Q13 | 1Q13 | 2Q12 | 2Q11 | |
Office: CBD | 6.8 | 6.6 | 6.4 | 6.4 |
Office: Suburban | 4.9 | 5.3 | 4.7 | 4.4 |
Industrial: Warehouse | 7.6 | 6.9 | 7.0 | 6.3 |
Industrial: R&D | 6.3 | 6.0 | 5.4 | 5.2 |
Industrial: Flex | 5.8 | 5.8 | 5.0 | 4.9 |
Retail: Regional mall | 6.4 | 5.6 | 5.4 | 5.7 |
Retail: Power center | 5.4 | 5.3 | 4.9 | 5.3 |
Retail: Neighborhood | 6.8 | 6.4 | 6.5 | 6.0 |
Multifamily | 7.0 | 7.1 | 7.5 | 7.5 |
Hotel | 6.5 | 6.4 | 6.2 | 6.7 |
With the exception of suburban office (down from 5.3 to 4.9 on a scale of 1 to 9) and multifamily (down from 7.1 to 7.0), investment conditions improved quarter over quarter, reflecting the view that real estate remains an attractive investment alternative.
Buy, Sell or Hold?
Buy (%) | Sell (%) | Hold (%) | |
Office: CBD | 59 | 29 | 12 |
Office: Suburban | 35 | 35 | 30 |
Industrial: Warehouse | 53 | 11 | 36 |
Industrial: R&D | 25 | 25 | 50 |
Industrial: Flex | 24 | 35 | 41 |
Retail: Regional mall | 31 | 38 | 31 |
Retail: Power center | 19 | 38 | 43 |
Retail: Neighborhood | 31 | 31 | 38 |
Multifamily | 28 | 33 | 39 |
Hotel | 54 | 8 | 38 |
All types | 36 | 28 | 36 |
Beyond a bias toward central business district (CBD) office, warehouse industrial, and hotels, there appear to be no screaming “buys” in investors’ minds. “Sell” sentiment appears to be gaining an upper hand in all categories except warehouse and hotel; we sense that many investors are considering taking a share of profits gained from opportunistic investments made during the 2008 to 2011/2012 period.
Pre–Tax Yield (IRR) (%)
Pre–tax yield (IRR) (%) | Change in basis points from prior quarter | |
Office: CBD | 7.9 | -10 |
Office: Suburban | 9.1 | +10 |
Industrial: Warehouse | 8.2 | 0 |
Increases | Change in basis points from prior quarter | Change in basis points from prior quarter |
Industrial: Flex | 9.7 | +60 |
Retail: Regional mall | 8.2 | +10 |
Retail: Power center | 8.6 | -20 |
Retail: Neighborhood | 8.2 | -20 |
Multifamily | 7.5 | -20 |
Hotel | 10.3 | +30 |
With the exception of flex industrial space, which seems to have “fallen out of bed,” pretax required yields (internal rates of return [IRRs]) moved within a narrow band, indicating investors’ “satisfaction” with current market pricing.
Capitalization Rates
Capitalization rates (%) | Change in basis points from prior quarter | |
Office: CBD | 6.1 | -10 |
Office: Suburban | 7.3 | 0 |
Industrial: Warehouse | 6.6 | 0 |
Industrial: R&D | 7.4 | -10 |
Industrial: Flex | 8.0 | +30 |
Retail: Regional mall | 6.2 | -10 |
Retail: Power center | 7.2 | -20 |
Retail: Neighborhood | 6.7 | -10 |
Multifamily | 5.5 | +20 |
Hotel | 6.1 | +10 |
Capitalization rates remained within a narrow band during the quarter. Transaction volume was reported at approximately $71 billion—an increase of 13 percent quarter over quarter.
E-Commerce Increases 18 Percent Year Over Year
According to data from the U.S. Census Bureau and Trepp LLC, second-quarter 2013 e-commerce retail sales increased 18 percent year over year and now account for almost 6 percent of total retail sales—an increase of 70 basis points since the second quarter of 2012.
Monday’s Numbers
The Trepp survey for the period ending August 9, 2013, showed average spreads widening 2 or 3 basis points as everyone—borrowers, lenders, and traders alike—is looking forward to Labor Day, hopeful that it will signal the end of increases in ten-year U.S. Treasury rates, which began on May 1 with the ten-year at 1.66 percent and closed last Friday at 2.84 percent—an increase of 118 basis points, taking the base lending rate above 4.5 percent.
At the moment, rates are increasing faster on an interperiod basis than we can report them. While everyone says liquidity remains plentiful, we are not really going to be in a position to project the directional bias of the markets until we get past Labor Day and participants’ strategies become more evident.
Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points | ||||||||
12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 7/19/13 | 7/26/13 | 8/2/13 | 8/9/13 | |
Office | 342 | 214 | 210 | 210 | 184 | 176 | 178 | 175 |
Retail | 326 | 207 | 207 | 192 | 168 | 158 | 163 | 159 |
Multifamily | 318 | 188 | 202 | 182 | 161 | 154 | 156 | 156 |
Industrial | 333 | 201 | 205 | 191 | 168 | 161 | 162 | 162 |
Average spread | 330 | 203 | 205 | 194 | 160 | 170 | 165 | 163 |
10-Year Treasury | 3.83% | 3.29% | 1.88% | 1.64% | 2.52% | 2.50% | 2.63% | 2.58% |
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 | 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): +15.09%
S&P 500 (2): +16.10%
NASDAQ (3): +19.32%
Russell 2000 (4): +20.60%
Morgan Stanley U.S. REIT (5): -2.76%
(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 | 8/18/13 | |
3-Month | 0.01% | 0.08% | 0.05% |
6-Month | 0.06% | 0.12% | 0.08% |
2-Year | 0.24% | 0.27% | 0.36% |
5-Year | 0.83% | 0.76% | 1.60% |
7-Year | 1.35% | 1.25% | 2.25% |
10-Year | 1.88% | 1.86% | 2.84% |
Key Rates (in Percentages) | ||
| Current | One year prior |
Federal funds rate | 0.05 | 0.15 |
Federal Reserve target rate | 0.25 | 0.25 |
Prime rate | 3.25 | 3.25 |
U.S. unemployment rate | 7.40 | 8.50 |
1-Month LIBOR | 0.18 | 0.24 |
3-Month LIBOR | 0.26 | 0.43 |