Monday’s Numbers: February 4, 2013

Transaction Volume, Pricing Metrics and a Prediction or Two for 2013

According to Real Capital Analytics (RCA), commercial property transaction volume increased approximately 24 percent year-over-year, driven by an array of factors ranging from the global search for yield to irrational fears regarding changes in the tax codes to the availability of mortgage financing at lifetime low interest rates. Sales totaled approximately $283 billion versus $229.2 billion in 2012.

Transaction activity should remain at the same general level in 2013 and, subject to a disruption in the equity and/or debt capital markets, is likely to reach $300 billion. It’s a momentum play, as the reasons that drove 2012 sales remain in place.

An analysis of a range of property sales indicates pricing made up a substantial measure of the decline suffered between 2007 and 2010 and is now on average within 20 percent of the peak levels achieved between mid-2007 and 2008, with the caveat that some markets are substantially higher and some are measurably lower.

Capitalization rates are leveling off (see recent National Council of Real Estate Investment Fiduciaries National Property Index and Capitalization Rate Reports and Real Estate Research Corporation’s surveys) and will be impacted by recent increases in yields for 10-year U.S. Treasury bonds; changes in value in 2013 will come primarily from growth in net operating income and not from capitalization rate compression. The real estate industry will once again be forced to make money the old fashioned way; they’ll have to earn it.

RCA estimates that of the $394 billion of mortgages that became “troubled” during the recent downturn, almost 60 percent has been resolved, leaving $194 billion of loans to be dealt with. The following two charts are instructive as they detail outstanding distressed loans by property type and lender, thereby providing direction as to what is currently or will be shortly available and where it “resides”, i.e., whose balance sheet it’s on.

If one combines the approximately 60 percent of the originally distressed commercial real estate mortgages worked out with financial institutions continuing need to de-leverage as well as repatriate capital to their home markets, it appears we may be reaching the end phase of this game with only the lower quality loans remaining to be resolved. We see lenders becoming more aggressive in 2013, and expect resolutions to increase to approximately 75 percent, even if lenders are required to take higher than anticipated losses.

2012 CMBS issuance equaled approximately $48 billion, and could reach $60 billion in 2013 given the number of conduits active in the market (25+), the reception five current offerings are receiving in the marketplace (as evidenced by where 10-year, AAA-rated bonds are trading), and the increasingly frenetic global search for yield.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads coming in a further 10-plus basis points as securitized and conventional lenders continue their war of attrition, compressing lending spreads in response to investors continuing to bid down, i.e., lower, yields on super-senior tranches of recent CMBS offerings. Each week, securitized lenders seem to become more competitive with conventional lenders; where this will end is anyone’s guess. If you’re a borrower, stop giggling; now’s the time to lock-in rates.

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⁾: +6.91%
S & P 500 ^(2): +6.10%
NASDAQ ⁽³⁾: +5.29%
Russell 2000 ⁽⁴⁾:7.28%
Morgan Stanley U.S. REIT ⁽⁵⁾:+5.29%

^{(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.}