The Real Estate Roundtable—the “political action” wing of the real estate industry—released the results of its fourth-quarter 2014 Sentiment Survey, which is based on surveys of CEOs, company presidents, and other senior executives regarding current and future conditions in the real estate industry. The survey focuses on three areas: overall real estate conditions, access to capital markets, and real estate asset pricing.
Topline findings included the following:
- Oft-mentioned risks that could seriously affect real estate investments and property valuations include (the inevitable) increase in interest rates and the political uncertainty associated with all things political and Washington;
- As it appears from the Feds statements over the past few weeks, increases in interest rates are likely to play out more slowly than expected; that said, current valuations appear “steep”;
- Equity and debt capital for real estate is widely available; and
- Return expectations have been dialed down by some investors who feel we are nearing the top of the current cycle.
What makes this survey so popular for some and required reading for others is that readers get a peek at the actual unedited and unfiltered written comments of survey participants.
While the survey remains positive, we think its tone is beginning to reflect increasing concerns and questions regarding how fast we’ve come to the current nexus.
The Boiling-Frog Syndrome
We thank Moody’s Investors Service for reminding us of the dangers of “boiling-frog syndrome” in a research report published earlier this year. First, from Wikipedia, the free online encyclopedia:
“The boiling-frog story is a widespread anecdote describing a frog slowly being boiled alive. The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability or unwillingness of people to react to significant changes that occur gradually, such as climate change.”
Is the real estate investment and finance business nearing its own boiling-frog moment? How else would you describe the steady progression of incremental declines in capitalization rates, the gravity-defying (low) level of interest rates combined with the availability of unlimited amounts of mortgage capital, the seeming collapse of risk premiums, increasingly higher loan-to-value ratios, lower debt yields and reduced debt-coverage ratios, increasingly lengthy periods of interest-only mortgage payments, forays into secondary and tertiary markets, acquisition of never-before-owned property types, implementing new investment strategies (i.e., such as value-added), and both the regulators and the rating agencies pointedly discussing deteriorating underwriting standards and procedures?
Certainly, Hell is not going to freeze over on any near-term basis, and real estate investment and finance are not in line for another 2007-to-2009-type experience. But we may be facing an inflection period, as transaction volume continues to increase, huge amounts of capital from a wide array of sources are waiting impatiently on the sidelines, and investors and lenders alike are close to knee-deep in the secondary and tertiary markets.
As we near year-end, let’s resolve to put our houses in order by reviewing and revising our business plans, dusting off and updating our “Plan Bs,” refinancing every property we can, and so on. You know the drill.
The capital markets remain fragile as evidenced by last week’s gyrations in the indices, and the ever-present likelihood of a “black swan” geopolitical/economic/cyber event upsetting the apple cart remains elevated.
Stephen Blank, ULI’s Senior Fellow, Real Estate, to Retire at Year-end
After 17 years with ULI as its senior fellow, finance, I have decided to retire, effective December 31, 2014.
During my tenure with ULI, we were able to make measurable progress in expanding the Institute’s real estate finance and capital markets information and education programs, including transforming Emerging Trends in Real Estate into a global brand; expanding the scope of the invitation-only ULI/McCoy Symposium on Real Estate Finance; speaking, moderating, and acting as a panelist at ULI and real estate industry events worldwide; using the Institute’s website as a vehicle for distributing current information, developing and teaching in-house and online courses on real estate finance, and being a founding member of ULI’s Responsible Property Investment Product Council.
My thanks to the many members and nonmembers who have taken the time over the years to post comments, suggestions, and well-deserved criticisms; all were welcome and helped shape the program of work.
Best wishes to all for a happy and healthy new year.
Steve
Monday’s Numbers
If many of the following numbers look familiar, they should; because of the Christmas–New Year holiday period, our usual data sources will be not be updating their surveys until the first or second week of January 2015.
Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points | |||||||
| Individual investors | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | Last week (12/12/14) | Week before last (12/5/14) | Month earlier |
| Office | 214 | 210 | 210 | 162 | 147 | 149 | 148 |
| Retail | 207 | 207 | 192 | 160 | 143 | 141 | 139 |
| Multifamily | 188 | 202 | 182 | 157 | 137 | 138 | 135 |
| Industrial | 201 | 205 | 191 | 159 | 141 | 141 | 142 |
| Averagespread | 203 | 205 | 194 | 160 | 145 | 142 | 141 |
| 10-yearTreasury | 3.29% | 2.88% | 1.64% | 3.04% | 2.10% | 2.18% | 2.37% |
The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads dated December 18, 2014, showed rates unchanged as compared with the prior survey period.
30-Year Fixed-Rate Commercial Real Estate Mortgages | |||
| Property | Maximum loan-to-value | Class A | Class B/C |
| Multifamily (agency) | 75–80% | T +160 | T +170 |
| Multifamily (nonagency) | 70–75% | T +170 | T +175 |
| Anchored retail | 70–75% | T +185 | T +195 |
| Strip center | 65–70% | T +185 | T +195 |
| Distribution/warehouse | 65–70% | T +185 | T +195 |
| R&D/flex/industrial | 65–70% | T +190 | T +200 |
| Office | 65–75% | T +180 | T +190 |
| Full-service hotel | 55–65% | T +235 | T + 255 |
| Debt-service-coverage ratio assumed to be greater than 1.35 to 1. | |||
Year-to-Date Public Equity Capital Markets
Dow Jones Industrial Average: +7.41 percent
Standard & Poor’s 500 Stock Index: +12.03 percent
NASD Composite Index (NASDAQ): +14.10 percent
Russell 2000: +2.78 percent
Morgan Stanley U.S. REIT Index: +22.51 percent
Year-to-Date Global CMBS Issuance | ||
| 2014 | 2013 | |
| U.S. | $90.4 | $83.3 |
| Non-U.S. | 5.8 | 12.5 |
| Total | $96.2 | $95.9 |
| Source: Commercial Mortgage Alert. | ||
Year-to-Date U.S. Treasury Yields
| U.S. Treasury Yields | |||
| 12/31/12 | 12/31/13 | 12/19/14 | |
| 3-month | 0.08% | 0.07% | 0.04% |
| 6-month | 0.12% | 0.10% | 0.11% |
| 2-year | 0.27% | 0.38% | 0.67% |
| 5-year | 0.76% | 1.75% | 1.66% |
| 7-year | 1.25% | 2.45% | 1.98% |
| 10-year | 1.86% | 3.04% | 2.17% |
