Monday’s Numbers: January 28, 2013

How Low Can Spreads Go?

Super-senior CMBS bonds are currently trading in the range of 72 basis points over ten-year interest rate swaps; one year ago, they were trading at 142 basis points over swaps. And as we have come to learn, the narrower bond spreads become, the lower the rate that securitized lenders can profitably charge borrowers. In fact, spreads have narrowed to the point that securitized lenders are giving conventional, portfolio lenders such as commercial banks and insurance companies a run for their money.

What’s driving this phenomenon and is it sustainable? The key driver appears to be the current global quest for yield by institutional investors trying to match income requirements with liabilities to beneficiaries. Where else are you going to invest your money when U.S. Treasury ten-year bonds are trading at yields below 2 percent?

Is it sustainable is another question, especially in the current “jittery” environment, with some many uncertainties, including the survival of the Euro Zone, China’s economy, increased regulation of the financial markets, potential for interest rate increases, the fiscal cliff, the U.S. debt ceiling, etc. Many worry that the financial markets are once again ahead of the physical markets.

For the moment, the investment market seems confident and comfortable with the CMBS market, especially after recent announcements by: Fitch saying that delinquency rates for Fitch-rated CMBS transactions declined to 7.99 percent in December from 8.17 percent a month earlier and 8.37 percent a year earlier; and Trepp saying that 2012 conduit loan payoffs were in excess of expectations with 72 percent of all loans paying off at maturity, 11 percent higher than in 2011. Trepps’ maturity breakdown was as follows: 37 percent paid off six months prior to maturity; 19 percent paid off at balloon date; 9 percent repaid after maturity; and 7 percent paid off at a loss of less than 2 percent.

Need Financing? Become a Real Estate Investment Trust

Prison REITs: been there, done that. Senior housing REITs: old news. Cell towers: how 2012. Single-family housing (aka, REO to rental): 2013’s headline. Next? CBS Outdoor’s announcement that it was investigating “unlocking” the value of its outdoor real estate (i.e., billboards) by converting its portfolio into a REIT. Ignoring the numerous technical issues that need to be addressed, REITs seem to be coming of age as a financing tool for non-traditional assets.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads continuing to compress, further evidence of investor demand in today’s yield-starved world.

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 ten-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⁾: +6.04%
S & P 500 ^(2): +5.38%
NASDAQ ⁽³⁾: +4.31%
Russell 2000 ⁽⁴⁾:6.58%
Morgan Stanley U.S. REIT ⁽⁵⁾:+4.77%

^{(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.}