Monday’s Numbers: March 4, 2013

Sequestration

Last week surprised both analysts and investors, as it lacked the volatility in the capital markets that many had expected to occur as the sequestration enacted as part of the Budget Control Act of 2011 approached. The $85 billion in enacted spending reductions are divided equally between spending for defense and domestic programs.

The same analysts and investors are now trying to puzzle out the impact of the sequestration on various industry sectors and companies. An obvious example is the public or private owner/developer of office property located in the Washington, D.C., metropolitan area who is exposed to both governmental whims as well as the reactions (and defensive actions) of governmental contractors, lobbyists, nongovernmental organizations (NGOs), etc. Just as obvious is the potentially negative impact on multifamily occupancy and rental rates and shopping center sales as local incomes and spending habits are influenced by the sequestration. The hospitality industry could be dinged as both business and vacation travel is curtailed in the Washington area, as well as nationwide, if the anticipated negative impact of sequestration on the economy occurs as predicted.

Commercial Mortgage–Backed Securities

CMBS originations year-to-date reached $15.9 billion last week, as compared with $3.3 billion for the same time period in 2012. It certainly looks as if the most aggressive projections of $100 billion in originations are possible.

But the market is getting crowded with deals. Investors are extracting their reward by pushing spreads wider, which will in turn increase the rates paid by borrowers. Obviously, we are not at or near the point where there is a borrowers’ revolt; this is just an item of interest, a word of caution, and an explanation of what we see happening in the market.

Insurance Company Lending Activity Circa 2012

According to the American Council of Life Insurers (ACLI), life insurance companies wrote approximately $45.6 billion in commercial mortgages in 2012, literally unchanged from 2011’s $45.5 billion. This is clear evidence that the market is becoming increasingly competitive, as CMBS lenders become both more aggressive and confident about the depth of their market and buyer interest.

The following are the key metrics from the ACLI survey:

• The insurers surveyed wrote 2,575 loans, 2,433 of which, having a balance of $36.4 billion, were fixed-rate loans.
• Average maturity equaled 10.75 years.
• Debt-service-coverage ratio equaled 2.1 to 1 as compared with 1.97 to 1 in 2011.
• Loan-to-value ratio averaged 60.8 percent (as compared with 59.8 percent in 2011).
• Average coupon for fixed-rate loans was 4.2 percent, or 274 basis points over U.S. Treasuries.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads unchanged with all-in cost for ten-year paper with low loan-to-value ratios remains sub-4 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 ten-year, fixed-rate mortgages coming in approximately 20 basis points across all property sectors compared with the prior survey period. We seem to have entered the “limbo stick”—a period in which borrowers and lenders alike wonder “how low can they go.”

Year-to-Date Public Equity Capital Markets

DJIA ⁽¹⁾: +7.52%
S&P 500 ⁽²⁾: +6.45%
NASDAQ ⁽³⁾: +4.98%
Russell 2000 ⁽⁴⁾: 7.70%
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.}