The charts below show the buy/sell/hold recommendations of institutional real estate investors and advisers participating in Real Estate Research Corporation’s first-, second-, and third-quarter surveys of investor attitudes.
The question is: Are these “trades” or “trends”? Once you’ve come to a decision, how do you then take advantage of what you have learned?
First Quarter, 2014 | |||
| Buy | Sell | Hold | |
| Office – CBD | 19% | 29% | 52% |
| Office – suburban | 42% | 21% | 37% |
| Warehouse | 55% | 14% | 31% |
| R & D | 11% | 32% | 57% |
| Flex | 15% | 35% | 50% |
| Regional malls | 7% | 33% | 60% |
| Power centers | 18% | 35% | 47% |
| Neighborhood retail | 37% | 11% | 52% |
| Multifamily | 21% | 53% | 26% |
| Hospitality | 31% | 15% | 54% |
| All types | 26% | 28% | 46% |
Second Quarter, 2014 | |||
| Buy | Sell | Hold | |
| Office – CBD | 40% | 27% | 33% |
| Office – suburban | 20% | 47% | 33% |
| Warehouse | 53% | 6% | 41% |
| R & D | 13% | 31% | 56% |
| Flex | 6% | 38% | 56% |
| Regional malls | 14% | 36% | 50% |
| Power centers | 20% | 20% | 60% |
| Neighborhood retail | 40% | 20% | 40% |
| Multifamily | 38% | 25% | 37% |
| Hospitality | 25% | 33% | 42% |
| All types | 27% | 28% | 45% |
Third Quarter, 2014 | |||
| Buy | Sell | Hold | |
| Office – CBD | 39% | 17% | 44% |
| Office – suburban | 33% | 50% | 17% |
| Warehouse | 45% | 10% | 45% |
| R & D | 25% | 20% | 55% |
| Flex | 20% | 30% | 50% |
| Regional malls | 18% | 24% | 58% |
| Power centers | 22% | 22% | 56% |
| Neighborhood retail | 50% | 11% | 39% |
| Multifamily | 32% | 26% | 42% |
| Hospitality | 27% | 20% | 53% |
| All types | 31% | 23% | 46% |
Here are a few observations from a quick review of the data; to do this properly, one should build an overlay sector by sector, quarter over quarter.
The percentage of investors on the buy side increased by 4 percent, to 31 percent from 27 percent last quarter, signaling continuing interest in the real estate sector and an apparent willingness among investors to acquire assets. This overall change appears to have come solely from a reduction in sell-side interest by owners; maybe they think prices have not come back far enough from their 2007 levels; maybe they think there is still some “meat on the bone” that they can capitalize into value; maybe . . . .
Or consider suburban office. Investors are having a difficult time rationalizing actions and strategies as evidenced by the wide swing in attitudes quarter-over-quarter. In the first quarter, there was solid buyer interest (42 percent); in the second quarter, the bottom fell out of the market, with buy-side interest declining to 20 percent. By the third quarter, the buy side had rebounded to 33 percent. On the sell side during the same period, the scores went from 21 percent to 47 percent and then to 50 percent, clearly indicating that sentiment had changed. This conclusion is buttressed by the hold numbers, which went from 37 percent in the first quarter to 33 percent in the second quarter to 17 percent in the third quarter. What appears a mass exodus to some will cry “opportunity” for others.
Monday’s Numbers
The Trepp survey for the week ending November 28, 2014, showed spreads relatively unchanged over the past 30 days, with the average spread declining 1 basis point. During the period, borrowers benefited from a 12-basis-point decline in the yield on ten-year Treasury notes. The implied all-in cost of 3.6 percent is 104—repeat, 104—basis points lower than it was on December 31, 2013. Ah, to be a borrower wanting a ten-year commercial or multifamily real estate mortgage on a property with a 50 to 59 percent loan-to-value ratio; can it get any better than this?
For the moment, the winds are at our backs: the economy continues to improve, with last week’s impressive job numbers a welcome surprise; the real estate economy and fundamentals continue to strengthen; and both real estate investment and mortgage lending are viewed in a very favorable light by institutional investors worldwide.
Herbert Stein, President Nixon’s economic adviser, supposedly once said: “If something can’t go on forever, it will stop.” Similarly with these low rates, some known or black swan event will occur and rates will increase sharply over the short term (and maybe the long term, too). Then it will be too late to take advantage of what some are starting to call a “generational refinancing opportunity.”
Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points | |||||||
| 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | This week (11/28/14) | Last week (11/21/14) | Month earlier | |
| Office | 214 | 210 | 210 | 162 | 149 | NA | 148 |
| Retail | 207 | 207 | 192 | 160 | 141 | NA | 142 |
| Multifamily | 188 | 202 | 182 | 157 | 138 | NA | 138 |
| Industrial | 201 | 205 | 191 | 159 | 141 | NA | 142 |
Average spread | 203 | 205 | 194 | 160 | 142 | NA | 143 |
10-year Treasury | 3.29% | 2.88% | 1.64% | 3.04% | 2.18% | 2.31% | 2.30% |
The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads dated November 6, 2014, show no change in required spreads as compared with the prior survey period, confirming our suspicion that all everyone is thinking about and focusing on is getting this year’s deals closed as well as issuing commitments for first-quarter 2015 deals that have been in the pipeline for a while.
So long as event risk is off the table, everything remains right with the financial world.
30-Year Fixed-Rate Commercial Real Estate Mortgages | |||
| Property | Maximum | Class A | Class B/C |
| Multifamily (agency) | 75–80% | T +160 | T +170 |
| Multifamily (nonagency) | 70–75% | T +170 | T +165 |
| 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: +8.34 percent
Standard & Poor’s 500 Stock Index: +11.63 percent
NASD Composite Index (NASDAQ): +14.47 percent
Russell 2000: +1.61 percent
Morgan Stanley U.S. REIT Index: +20.55 percent
Year-to-Date Global CMBS Issuance | ||
| 2014 | 2013 | |
| U.S. | $87.0 | $79.3 |
| Non-U.S. | 4.5 | 12.5 |
| Total | $91.5 | $91.8 |
| Source: Commercial Mortgage Alert. | ||
Year-to-Date U.S. Treasury Yields
U.S. Treasury Yields | |||
| 12/31/12 | 12/31/13 | 12/5/14 | |
| 3-month | 0.08% | 0.07% | 0.08% |
| 6-month | 0.12% | 0.10% | 0.08% |
| 2-year | 0.27% | 0.38% | 0.65% |
| 5-year | 0.76% | 1.75% | 1.69% |
| 7-year | 1.25% | 2.45% | 2.06% |
| 10-year | 1.86% | 3.04% | 2.31% |
