“It’s the [Relative] Yield…Stupid!
In CMBS world, spreads—at the deal level, not your borrowing level [as yet]—are tightening, challenging levels we haven’t seen in practically forever. And so we ask ourselves what is going on—what is driving investors to invest in CMBS and receive skimpier and skimpier rates of return?
To us it appears obvious…it’s the “relative yield,” i.e. the positive yield advantage available in CMBS bonds as compared to alternative fixed-income securities. Institutional investors find themselves in an incredible bind: their cost to pay beneficiaries remains static while the yield on their fixed income investments [like everyone else’s] is declining due to the actions of the Federal Reserve and the various central banks designed to keep interest rates at today’s incredibly low levels.
So what’s an investor to do? Seek out alternatives like CMBS. Fortunately for investors, the positives seem to outweigh the concerns when one looks at the CMBS market. For example, according to a recent report from Fitch, the percentage of CMBS loans in Fitch-rated offerings that are delinquent by 60 days or in foreclosure declined from 8.48 percent in July to 8.39 percent in August. A year ago (August 31, 2011), the rate was 8.65 percent. And while modestly lower (less stringent) underwriting standards were noted in a recent offering—the offering included a pro-forma underwritten loan—the loan’s current income was sufficient to pay current debt service.
Hopefully, the next step will be that the decrease in spread will translate into lower interest costs for property owners borrowing in the CMBS space.
Monday’s Numbers
The Trepp, LLC survey showed commercial mortgage spreads widening a few basis points during the survey period as floor pricing continues in effect with rates in the 4.0 percent to 5.0 percent range.
Asking Spreads over U.S. Treasury Bonds in Basis Points | ||||||
12/31/09 | 12/31/10 | 12/31/11 | 9/7/12 | Week Earlier | Month Earlier | |
Office | 342 | 214 | 210 | 234 | 233 | 245 |
Retail | 326 | 207 | 207 | 227 | 221 | 232 |
Multifamily | 318 | 188 | 198 | 216 | 210 | 225 |
Industrial | 333 | 201 | 205 | 227 | 228 | 233 |
Average Spread | 330 | 203 | 205 | 226 | 223 | 234 |
10-Year Treasury | 3.83% | 3.29% | 1.88% | 1.64% | 1.63% | 1.65% |
The Cushman & Wakefield Equity, Debt, and Structured Finance Commercial Mortgage Spread monthly survey of commercial mortgage spreads showed spreads for 10-year, fixed rate mortgages, coming in five to 10 basis points.
Property Type | Mid-Point of Fixed Rate Commercial Mortgage | ||||
12/31/10 | 5/30/12 | 6/28/12 | 7/26/12 | 9/3/12 | |
Multifamily - Non-Agency | +270 | +250 | +245 | +245 | +240 |
Multifamily – Agency | +280 | +210 | +225 | +225 | +225 |
Regional Mall | +280 | +300 | +300 | +295 | +290 |
Grocery Anchored | +280 | +295 | +295 | +290 | +285 |
Strip and Power Centers |
| +320 | +320 | +315 | +310 |
Multi-Tenant Industrial | +270 | +305 | +305 | +300 | +295 |
CBD Office | +280 | +295 | +300 | +295 | +285 |
Suburban Office | +300 | +315 | +315 | +315 | +305 |
Full-Service Hotel | +320 | +360 | +360 | +360 | +360 |
Limited-Service Hotel | +400 | +370 | +370 | +370 | +370 |
5-Year Treasury | 2.60% | 0.69% | 0.69% | 0.57% | 0.68% |
Source: Cushman & Wakefield Equity, Debt, and Structured Finance. | |||||
Property Type | Mid-Point of Fixed Rate Commercial Mortgage | ||||
12/31/10 | 5/30/12 | 6/28/12 | 7/26/12 | 9/3/12 | |
Multifamily - Non-Agency | +190 | +220 | +220 | +220 | +210 |
Multifamily – Agency | +200 | +190 | +200 | +210 | +210 |
Regional Mall | +175 | +245 | +245 | +235 | +230 |
Grocery Anchor | +190 | +230 | +235 | +230 | +225 |
Strip and Power Centers |
| +260 | +255 | +250 | +245 |
Multi-Tenant Industrial | +190 | +260 | +260 | +255 | +250 |
CBD Office | +180 | +250 | +250 | +245 | +235 |
Suburban Office | +190 | +270 | +265 | +265 | +260 |
Full-Service Hotel | +290 | +295 | +290 | +290 | +290 |
Limited-Service Hotel | +330 | +320 | +310 | +310 | +310 |
10-Year Treasury | 3.47% | 1.62% | 1.58% | 1.42% | 1.64% |
Source: Cushman & Wakefield Equity, Debt, and Structured Finance. | |||||
Property Type | Mid-Point of Floating-Rate Commercial Mortgage | ||||
12/31/10 | 5/30/12 | 6/28/12 | 7/26/12 | 9/3/12 | |
Multifamily – Non-Agency | +250-300 | +200-250 | +200-260 | +200-260 | +200-260 |
Multifamily- Agency | +300 | +220-265 | +220-265 | +220-265 | +220-265 |
Regional Mall | +275-300 | +210-275 | +210-275 | +210-275 | +210-275 |
Grocery Anchored | +275-300 | +205-275 | +210-275 | +210-275 | +210-275 |
Strip and Power Centers |
| +225-300 | +225-300 | +225-300 | +225-300 |
Multi-Tenant Industrial | +250-350 | +235-305 | +235-305 | +230-305 | +230-305 |
CBD Office | +225-300 | +225-300 | +225-300 | +225-300 | +225-300 |
Suburban Office | +250-350 | +250-325 | +250-325 | +250-325 | +250-325 |
Full-Service Hotel | +300-450 | +275-400 | +275-400 | +275-400 | +275-400 |
Limited-Service Hotel | +450-600 | +325-450 | +325-450 | +325-450 | +325-450 |
1-Month LIBOR | 0.26% | 0.24% | 0.24% | 0.24% | 0.24% |
3-Month LIBOR | 0.30% | 0.47% | 0.47% | 0.46% | 0.43% |
* A dash (-) indicates a range. | |||||
Source: Cushman & Wakefield Equity, Debt, and Structured Finance. | |||||
Year-to-Date Public Equity Capital Markets
DJIA (1): +11.26%
S & P 500 (2): +16.55%
NASDAQ (3): +22.22%
Russell 2000 (4):+16.70%
Morgan Stanley U.S. REIT (5):+17.79%
(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.
U.S. Treasury Yields | |||
12/31/10 | 12/31/11 | 9/15/12 | |
3-Month | 0.12% | 0.01% | 0.10% |
6-Month | 0.18% | 0.06% | 0.12% |
2 Year | 0.59% | 0.24% | 0.25% |
5 Year | 2.01% | 0.83% | 0.71% |
7 Year |
|
| 1.23% |
10 Year | 3.29% | 1.88% | 1.87% |
Key Rates (in Percentages) | |||||
| Current | 1 Mo. Prior | 3 Mo. Prior | 6 Mo. Prior | 1 Yr. Prior |
Fed Funds Rate | 0.17 | 0.14 | 0.18 | 0.14 | 0.11 |
Federal Reserve Target Rate | 0.25 | 0.25 | 0.25 | 0.25 | 0.25 |
Prime Rate | 3.25 | 3.25 | 3.25 | 3.25 | 3.25 |
US Unemployment Rate | 8.10 | 8.30 | 8.20 | 8.30 | 9.10 |
1-Month Libor | 0.22 | 0.24 | 0.24 | 0.24 | 0.23 |
3-Month Libor | 0.39 | 0.44 | 0.47 | 0.47 | 0.35 |
