“Cat” bonds, short for catastrophe, are risked-linked financial instruments used by an insurer to transfer a specified set of risks from its account to that of a third party. These bonds have been around for the past ten years or so; they were created after Hurricane Andrew and the Northridge earthquake and have provided a mechanism for an insurer to mitigate some portion of the risk it would face. How do they work?

An insurance company, via an intermediary such as an investment bank, issues bonds that are then sold to institutional investors. The bonds, which usually are short in duration—say, three years or less—are rated BB by one of the rating agencies such as Standard & Poor’s, Moody’s, or Fitch. If no catastrophic event occurs, the investors receive semiannual interest payments; investors receive a premium rate of interest on the bonds to offset the risks. If a catastrophic event does occur, repayment of the principal amount owed by the insurance company is forgiven by the investors and the insurance company may use the funds to satisfy claims.

What does this have to do with real estate? As usual, nothing and everything. So far this year, $5.5 billion of catastrophe and similar insurance-linked bonds have been issued. Most recently, an insurer issued $130 million of bonds linked to payments of damages as the result of meteor strikes, volcanic eruptions, and some wildfires, thunderstorms, and blizzards. The offerings appeared to sell well; after offering, trading seems fine . . . so far. Our concern remains rooted in the fact that institutional investors seem willing to go further and further afield and appear willing to take increasingly large risks in search of yield because returns on more mundane assets are so paltry. But what happens when the markets are disrupted by some geopolitical or economic event? A hedge fund might be prepared for this, but what about a pension fund?

Monday’s Numbers

The Trepp survey for the week ended May 23 showed spreads widening about 4 basis points; fast forward one week and the survey (dated May 30) show spreads coming in at 4+/- basis points. The implied ten-year commercial real estate mortgage rate for institutional properties remains at 4.00+/- percent.

Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points
(Ten-year commercial and multifamily mortgage loans
for properties with 50% to 59% loan-to-value ratios)

12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 5/30/14 Month Earlier
 Office 342 214 210 210 162 146 158
 Retail 326 207 207 192 160 140 138
 Multifamily 318 188 202 182 157 131 132
 Industrial 333 201 205 191 159 135 136
 Averagespread 330 203 205 194 160 143 140
 10-yearTreasury 3.83% 3.29% 2.88% 1.64% 3.04% 2.60% 2.61%


The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads, dated June 5, showed spreads coming in 15 to as much as 20 basis points since the previous survey, dated May 9, as lenders compete for business in a very competitive business environment. No one expects this to change in the near term.

In its “Market Commentary” accompanying the survey, C&W noted the following:

  • The current data suggest that strength in the economy during the second quarter of 2014 will more than offset the contraction experienced during the first quarter.
  • Deal flow may be slightly lower than last year, but only at the margins. Commercial mortgage–backed securities (CMBS) issuance, which is running slightly below last year’s pace, seems to be picking up, with a number of conduits readying offerings for marketing before June 30.
  • Ten-year Treasury yields continue to drop and spreads continue to narrow, bringing lending costs to their lowest levels in more than a year.
  • At low loan-to-cost levels (50 percent or less), nonrecourse construction loans are becoming available from commercial banks in the LIBOR-plus-400-basis-points range.
 Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of June 5, 2014)
Property Maximum
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: +2.10%

Standard & Poor’s 500 Stock Index: +5.47%

NASD Composite Index (NASDAQ): +3.47%

Russell 2000: +0.13%

Morgan Stanley U.S. REIT Index: +13.77%


Year-to-Date Global CMBS Issuance

(in $ billions as of 6/6/14)

2014 2013
U.S. $34.3 $39.0
Non-U.S. 0.5 4.7
Total $34.8 $43.7
Source: Commercial Mortgage Alert


Year-to-Date Public U.S. Treasury Yields

U.S. Treasury Yields
12/31/12 12/31/13 6/7/14
 3-month 0.08% 0.07% 0.04%
 6-month 0.12% 0.10% 0.06%
 2-year 0.27% 0.38% 0.41%
 5-year 0.76% 1.75% 1.66%
 7-year 1.25% 2.45% 2.19%
 10-year 1.86% 3.04% 2.60%