The Real Estate Research Corporation has released its buy/sell/hold recommendations for the first and second quarters of 2014 based on an investor attitude survey. Whereas quarterly averages have not changed much quarter over quarter in aggregate, significant movement can be seen at the individual property-sector level (see tables below).
What accounts for these changes over such a short period—one quarter to the next—is perplexing. Actual or perceived changes in fundamentals do not normally change so quickly, and interest rates during the study period were literally unchanged. As an example of the dramatic changes, buy recommendations for offices in central business districts (CBDs) more than doubled from the first to second quarter—from 19 percent to 40 percent—as investors moved from “hold and wait” to “must buy now” modes. During the same period, the bottom fell out of the suburban office sector, with buy recommendations tumbling—from 42 percent to 20 percent—and sell recommendations more than doubling, from 21 percent to 47 percent.
While changes in the multifamily sector were also measurable, they did not reach the magnitude of those in the office sector; changes in the other sectors were more moderate.
The question is whether these are trades or trends. We will see in three months.
| Investor Attitude Survey | ||||||
| First quarter 2014 | Second quarter 2014 | |||||
| Buy | Sell | Hold | Buy | Sell | Hold | |
| Office–CBD | 19% | 29% | 52% | 40% | 27% | 33% |
| Office–suburban | 42% | 21% | 37% | 20% | 47% | 33% |
| Warehouse | 55% | 14% | 31% | 53% | 6% | 41% |
| R&D | 11% | 32% | 57% | 13% | 31% | 56% |
| Flex | 15% | 35% | 50% | 6% | 38% | 56% |
| Regional malls | 7% | 33% | 60% | 14% | 36% | 50% |
| Power centers | 18% | 35% | 47% | 20% | 20% | 60% |
| Neighborhood retail | 37% | 11% | 52% | 40% | 20% | 40% |
| Multifamily | 21% | 53% | 26% | 38% | 25% | 37% |
| Hospitality | 31% | 15% | 54% | 25% | 33% | 42% |
| All types | 26% | 28% | 46% | 27% | 28% | 45% |
Source: Real Estate Research Corporation
Monday’s Numbers
The Trepp survey for the week ended July 4 showed spreads widening slightly as the market prepared to take a breath after the previous week’s decline of over 10 basis points; the implied rate for ten-year, modestly leveraged commercial real estate mortgages remains 4.0 percent. The Fed announced that it will stop adding to its bond portfolio; in the opinion of many investors and analysts, the countdown to higher interest rates has begun, with midnight occurring during summer 2015.
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 (7/4/14) | Last week (6/27/14) | Month earlier | |
| Office | 214 | 210 | 210 | 162 | 141 | 139 | 146 |
| Retail | 207 | 207 | 192 | 160 | 135 | 139 | 140 |
| Multifamily | 188 | 202 | 182 | 157 | 130 | 123 | 131 |
| Industrial | 201 | 205 | 191 | 159 | 132 | 123 | 135 |
| Averagespread | 203 | 205 | 194 | 160 | 135 | 131 | 138 |
| 10-yearTreasury | 3.29% | 2.88% | 1.64% | 3.04% | 2.65% | 2.54% | 2.61% |
The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads, dated July 10, showed spreads coming in about 5 basis points since the previous survey, dated June 5, as lenders continue to compete for business; implied all-in cost ranges from 4.25% to 4.50%.
In its “Market Commentary,” C&W noted that issuance of commercial mortgage–backed securities had declined 8.0 percent during the first half of 2014, but that the number was expected to increase during the second half because almost $20 billion in deals are in the pipeline.
| Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of July 10, 2014) | |||
| Property | Maximum loan-to-value | Class A | Class B |
| Multifamily (agency) | 75–80% | T +170 | T +170 |
| Multifamily (nonagency) | 70–75% | T +165 | T +180 |
| Anchored retail | 70–75% | T +185 | T +195 |
| Strip center | 65–70% | T +190 | T +200 |
| Distribution/warehouse | 65–70% | T +180 | T +200 |
| R&D/flex/industrial | 65–70% | T +190 | T +210 |
| Office | 65–75% | T +185 | T +195 |
| Full-service hotel | 55–65% | T +240 | T +260 |
| Debt-service-coverage ratio assumed to be greater than 1.35 to 1. | |||
Year-to-Date Public Equity Capital Markets
Dow Jones Industrial Average: +2.21%
Standard & Poor’s 500 Stock Index: +6.45%
NASD Composite Index (NASDAQ): +5.72%
Russell 2000: –0.32%
Morgan Stanley U.S. REIT Index: +13.44%
| Year-to-Date Global CMBS Issuance ($ Billion as of 7/11/14) | ||
| 2014 | 2013 | |
| U.S. | $42.6 | $46.9 |
| Non-U.S. | 0.9 | 7.4 |
| Total | $43.5 | $53.7 |
| Source: Commercial Mortgage Alert. | ||
Year-to-Date Public U.S. Treasury Yields
| U.S. Treasury Yields | |||
| 12/31/12 | 12/31/13 | 7/1/14 | |
| 3-month | 0.08% | 0.07% | 0.02% |
| 6-month | 0.12% | 0.10% | 0.07% |
| 2-year | 0.27% | 0.38% | 0.48% |
| 5-year | 0.76% | 1.75% | 1.65% |
| 7-year | 1.25% | 2.45% | 2.13% |
| 10-year | 1.86% | 3.04% | 2.53% |
