Monday’s Numbers: April 14, 2014
The Trepp survey for the period ending April 4, 2014, showed spreads basically unchanged, with the implied ten-year rate for properties with 50 percent to 59 percent loan-to-value ratios at 4.10 percent. No matter how competitive the commercial mortgage business is, don’t be surprised if in the not-too-distant future we hear some lender scream, “Whoa, these risk-adjusted spreads are too small; we can’t make money at these levels.” Yes, we know all the arguments about relative-value comparisons, about how stocks are yielding +/–2.0 percent, etc. But what we also know is that interest rates are going to increase—maybe not until 2016, but increase they will—and there is nothing an investor wants to own less than a portfolio of fixed-rate commercial real estate mortgages.
Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points | |||||||
12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | 4/4/14 | Month earlier | |
| Office | 342 | 214 | 210 | 210 | 162 | 153 | 152 |
| Retail | 326 | 207 | 207 | 192 | 160 | 143 | 143 |
| Multifamily | 318 | 188 | 202 | 182 | 157 | 136 | 137 |
| Industrial | 333 | 201 | 205 | 191 | 159 | 140 | 140 |
| Average spread | 330 | 203 | 205 | 194 | 160 | 143 | 143 |
| 10-year Treasury | 3.83% | 3.29% | 0.88% | 1.64% | 3.04% | 2.74% | 2.70% |
The Cushman & Wakefield (C&W) Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads, dated April 3, 2014, showed spreads for Class A property coming in 5 to 10 basis points with spreads for Class B property coming in as much as 15 basis points as the market at all levels becomes increasingly competitive with lenders aggressively reducing spreads to win business. For now, advantage to the borrower.
In its comment accompanying the survey, C&W noted the following:
- It was recently reported that private real estate funds have more than $100 billion of “dry powder” focused on acquisitions of property located in North America. Assuming 50 percent leverage, that’s “buying power” equal to $200 billion, or 56 percent of 2013’s estimated total real estate sales transactions.
- Spreads for newly issued commercial mortgage–backed securities (CMBS) have remained stable to slightly tighter since January 1, 2014, with super-senior bonds trading inside 90 basis points and BBB-rated paper stable at swaps plus 345 to 395 basis points. Net of the financial-speak, what this means is spreads to borrowers continue to trend down, indicating that originators are finding it necessary to lower their profit to win business. Advantage to the borrower again.
Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of April 3, 2014) | |||
Property | Maximum loan-to-value | Class A | Class B |
| Multifamily (agency) | 75–80% | T +165 | T +170 |
| Multifamily (nonagency) | 70–75% | T +170 | T +180 |
| Anchored retail | 70–75% | T +195 | T +205 |
| Strip center | 65–70% | T +210 | T +220 |
| Distribution/warehouse | 65–70% | T +195 | T +205 |
| R&D/flex/industrial | 65–70% | T +205 | T +215 |
| Office | 65–75% | T +190 | T +200 |
| Full-service hotel | 55–65% | T +255 | T +275 |
| Debt-service-coverage ratio assumed to be greater than 1.35 to 1. | |||
Year-to-Date Public Equity Capital Markets
Dow Jones Industrial Average: –3.32%
Standard & Poor’s 500 Stock Index: –1.77%
NASD Composite Index (NASDAQ): –4.23%
Russell 2000: –4.49%
Morgan Stanley U.S. REIT Index: +5.79%
Year-to-Date Global CMBS Issuance | ||
2014 | 2013 | |
| U.S. | $20.5 | $27.0 |
| Non-U.S. | 0.5 | 2.5 |
| Total | $201.1 | $29.4 |
| Source: Commercial Mortgage Alert. | ||
Year-to-Date Public U.S. Treasury Yields
U.S. Treasury Yields | |||
12/31/12 | 12/31/13 | 4/13/14 | |
| 3-month | 0.08% | 0.07% | 0.04% |
| 6-month | 0.12% | 0.10% | 0.06% |
| 2-year | 0.27% | 0.38% | 0.43% |
| 5-year | 0.76% | 1.75% | 1.58% |
| 7-year | 1.25% | 2.45% | 2.16% |
| 10-year | 1.86% | 3.04% | 2.63% |
