Monday’s Numbers: January 21, 2013

Cap Rates Mixed

Real Estate Research Corporation’s fourth quarter 2012 Real Estate Investment Criteria survey showed investment conditions and capitalization rates mixed quarter-over-quarter with the markets seemingly needing time to catch its collective breath after a frenetic quarter during which equity capital flooded the markets.

As the following chart indicates, investment conditions (rated on a scale of 1 equals poor to 10 equals excellent) were mixed (which is another way of saying all over the place):

Let’s ignore changes between -0.1 and +0.1 and focus on trying to rationalize those sectors where the changes quarter-over-quarter were more pronounced. We can see the change in industrial-warehouse as reflecting investor’s increased confidence in the economy and part of a logical progression that starts with increased employment leading to increased consumer spending leading to requirements for increased inventories and voila, the need for more industrial space.

In regard to power centers, it would appear to us that they may have become oversold as many investors and analysts have been down on the breed, worried about the health of big box retailers. Possibly, investors are having a “uh-oh” moment and see a need to stake a claim to greater investment in the sector as the economy improves.

The downward dip in multifamily and hospitality seem the easiest to explain as the sectors have been white hot with investment dollars pouring in and now it’s time to take a rest period and fine tune strategies.

Capitalizations rates seem pretty stable with the exception of regional malls (which decreased 0.4%) and hospitality (which increased 0.4%). The quantum change in regional malls is hard to explain as so few of them trade; the sector is primarily controlled by institutional investors and REITs, none of whom we see as sellers, regardless of price, as there is no place to reinvest the proceeds. Hospitality is sort of an enigma as investment conditions deteriorated (indicating an overbought sector) while cap rates decreased indicating inflows of buy-side capital.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads coming in as much as 21 basis points as investors continue to chase yields on debt securities such as commercial mortgage-backed securities. Need proof: AAA, average life 10-year CMBS 2.0 securities, were trading at 142 basis points over 10-year swaps one year ago; on January 17^th, they were trading at 71 basis points over swaps.

The further spreads come in, the more competitive securitized lenders can be in pricing loans. And evidence is starting to mount that more and more owners are to consider a securitized execution as compared to a conventional one, causing some analysts to increase their projections of CMBS issuance in 2013 to reach the $75 billion level, quite the increase from 2012’s $48.4 billion.

The Cushman & Wakefield Equity, Debt, and Structured Finance Commercial Mortgage Spread monthly survey of commercial mortgage spreads for the period ending January 3, 2013 showed spreads for 10-year, fixed rate mortgages, coming in approximately 5 to 10 basis points across all property sectors over the past 30 days.

Year-to-Date Public Equity Capital Markets

DJIA ⁽¹⁾: +4.16%
S & P 500 ^(2): +4.19%
NASDAQ ⁽³⁾: +3.82%
Russell 2000 ⁽⁴⁾:5.12%
Morgan Stanley U.S. REIT ⁽⁵⁾:+3.35%

^{(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.}