Monday’s Numbers: February 25, 2013

One Week to Go

With only a week to go until $85 billion in “sequestration” budget cuts are scheduled to take effect, this past week has been filled with dire predictions of their impact. In fact, many are just exhausted trying to figure out what will still be working after the budget cuts come to pass. As there is nothing else to be done, we sit and wait.

Real Estate Roundtable Q1 2013 Sentiment Survey

The Real Estate Roundtables Q1 2013 survey of senior real estate industry executives showed a general improvement in respondent’s perception of current and future market conditions, tempered by concerns regarding budget concerns (globally), job creation (again globally), and the prospect of increasing interest rates (again globally). The survey measures respondent’s views on current conditions as well as a future outlook on:

1. Overall real estate conditions;
2. Access to capital markets; and
3. Real estate asset pricing.

The following is a summary of the survey’s topline findings:

• The Q1 Index saw a modest increase as conditions appear to be slowly improving; that said, optimism is tempered due to lingering concerns about economic and fiscal uncertainties.
• As commercial real estate continues its gradual recovery, industry leaders are hoping for economic growth and improving fundamentals — rather than cheap debt — to be the key drivers.
• Fueled by low interest rates, asset values continue to appreciate, and in many cases have reached pre-crisis levels; however, the threat of rising interest rates is looming.
• The availability of debt capital has been a significant driver of market recovery, especially in “gateway” areas — though less so for riskier assets; equity capital has also been abundant for high-quality, highly-tenanted assets.

10-Year Fixed Rate Mortgages Rates by Asset Class

Cushman & Wakefield Equity, Debt, and Structured Finance, in a recently released “Market Commentary”, provided the following 10-year fixed rates mortgage rates by asset class:

NCREIF Property Index

The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index, which is comprised of 7,270 properties valued at $319.9 billion, produced positive total returns for the 12^th consecutive quarter. Total return for calendar year 2012 equaled 10.2 percent comprised of 5.8 percent return from property income and 4.5 percent from property appreciation in value. For calendar year 2011, the index produced overall returns equal to 14.3 percent.

Retail was the top performing sector, showing total returns of 11.6 percent comprised of 6.2 percent from income and 5.2 percent from appreciation in value.

The office sector was the only sector of the four main food groups which underperformed the overall index as both urban and suburban properties underperformed the overall index.

The multifamily sector, while slowing, continued to outperform; capitalization rates appear to be stabilizing while the rate of appreciation is declining.

Overall, industrial properties outperformed the index.

On a regional basis, the West was the leading region, followed by the South (driven by multifamily and retail properties), the Mid-west (whole results are dominated by Chicago’s contribution), and the East.

Sign of the Times

We assume it did not go unnoticed that China Vanke, China’s leading developer by sales, will invest in a 669-unit residential property to be developed by Tishman Speyer Properties in San Francisco. It is anticipated that China Vanke will have a 70 percent interest in the project.

“There is no point telling Chinese companies to mind their own domestic business. A good enterprise in the 21^st century must be armed with a global vision” noted Wang Shi, Vanke’s chairman on Weibo, a popular Chinese microblog site.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads continuing to decrease, coming in four basis points and reaching lows not seen “in forever.” All-in cost for 10-year paper with low loan-to-value ratios remains sub-four percent.

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial mortgage spreads for the period ending January 31, 2013 showed spreads for 10-year, fixed rate mortgages, coming in approximately 20 basis points across all property sectors compared to the prior survey period. We seem to have entered the “limbo stick,” a period in which borrower’s and lender’s alike wonder how low can they go.

Year-to-Date Public Equity Capital Markets
DJIA ⁽¹⁾: 6.84%
S & P 500 ^(2): +6.27%
NASDAQ ⁽³⁾: +4.71%
Russell 2000 ⁽⁴⁾: +7.87%
Morgan Stanley U.S. REIT ⁽⁵⁾:+5.19%

^{(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.}