The Real Estate Roundtable released its Q2 2014 Sentiment Survey, measuring senior executives’ “confidence in the real estate environment.” Survey participants, listed in the back of the survey, represent a “who’s who” of industry CEOs, presidents, and senior executives.
Topline findings include:
- The index remained basically unchanged from the previous quarter: while participants noted improvement in the economy, their views were tempered by both domestic and geopolitical concerns. No surprise here: no matter how optimistic you may be, you cannot ignore what is lurking in the closet.
- Fundamentals, with some geographic and property sector variances, continue to improve. Agreed.
- Views on future asset values were mixed, as participants debated the change velocity at the intersection of changes in net operating incomes and interest rates.
- Equity and debt capital remain “abundant” from both domestic as well as international investors.
U.S. CMBS Delinquency Rate Continues to Improve
According to Trepp LLC, the delinquency rate on U.S. commercial mortgage–based securities (CMBS) decreased 10 basis points in April to 6.44 percent, the 11th-consecutive monthly decrease. The current delinquency rate is 259 basis points below where it was one year ago and 390 basis points below its all-time high of 390 basis points in 2012. This is encouraging news, unless you are looking for opportunistic, workout type of rates of return.
Goldman Sachs Closes Commercial Credit Fund with $4 Billion in Total Capitalization
Goldman Sachs announced last week that it had closed its second private real estate fund focused on funding senior and mezzanine loans for acquisitions, refinancing, and recapitalizations of real estate located in the United States and Europe.
We see this fund as the first of many that will see returns from providing mortgage capital to the commercial real estate industry as an attractive investment compared with other income-producing alternatives.
To Buy, to Sell, or to Hold
On one hand, a change in investor sentiment seems to be happening. According to Real Estate Research Corporation’s quarterly survey of institutional investors, advisers, and real estate managers, buy sentiment is weakening while both hold and sell sentiments are increasing (see chart below).
On the other hand, investors report that acquiring property continues to be “like hand-to-hand” combat, with properties “priced to perfection” and the odds favoring the seller. One might think a “buyer’s strike” could be in the offing, but our sense is that that will not be the case with equity and debt capital “super plentiful.”
| Property sector | 1Q 2014 (%) | 4Q 2013 (%) | 3Q 2013 (%) | ||||||
Buy | Sell | Hold | Buy | Sell | Hold | Buy | Sell | Hold | |
| Office/CBD | 17 | 33 | 50 | 36 | 32 | 32 | 35 | 30 | 35 |
| Office/suburban | 30 | 30 | 40 | 43 | 19 | 38 | 43 | 30 | 27 |
| Warehouse | 46 | 15 | 39 | 58 | 13 | 29 | 52 | 16 | 32 |
| R&D | 8 | 23 | 69 | 30 | 13 | 57 | 26 | 22 | 52 |
| Flex | 8 | 31 | 61 | 32 | 18 | 50 | 14 | 19 | 67 |
| Regional mall | 0 | 40 | 60 | 6 | 33 | 61 | 26 | 26 | 48 |
| Power center | 18 | 45 | 37 | 20 | 25 | 55 | 18 | 32 | 50 |
| Neighborhood | 33 | 17 | 50 | 45 | 10 | 45 | 55 | 5 | 40 |
| Multifamily | 25 | 50 | 25 | 30 | 52 | 18 | 16 | 56 | 28 |
| Hospitality | 29 | 14 | 57 | 28 | 17 | 55 | 28 | 17 | 55 |
| All property | 21 | 30 | 49 | 33 | 23 | 44 | 31 | 25 | 44 |
Monday’s Numbers
The Trepp survey for the week ended May 9 showed rates coming in a few basis points as lenders lend and borrowers borrow. It’s business as usual if you can say it’s “usual” when the implied mortgage rate is 4.00%. While rates can certainly go lower, this is certainly as good as it may get and now the time to lock in these low rates for the longest term possible.
Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points(Ten-year commercial and multifamily mortgage loansfor properties with 50% to 59% loan-to-value ratios) | |||||||
12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | 5/2/14 | Month earlier | |
| Office | 342 | 214 | 210 | 210 | 162 | 150 | 152 |
| Retail | 326 | 207 | 207 | 192 | 160 | 138 | 142 |
| Multifamily | 318 | 188 | 202 | 182 | 157 | 133 | 136 |
| Industrial | 333 | 201 | 205 | 191 | 159 | 136 | 141 |
| Average spread | 330 | 203 | 205 | 194 | 160 | 139 | 143 |
| 10-year Treasury | 3.83% | 3.29% | 0.88% | 1.64% | 3.04% | 2.60% | 2.82% |
The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads, dated April 3, showed spreads for Class A property coming in 5 to 10 basis points, with spreads for Class B property coming in as high 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 their comment accompanying the survey, C&W noted the following:
- It was recently reported that private real estate funds have in excess of $100 billion of “dry powder” focused on acquisitions of property located in North America. If one assumes 50 percent leverage, that is “buying power” equal to $200 billion, or 56 percent of 2013’s estimated total real estate sales transactions.
- Spreads for newly issued CMBS have remained stable to slightly tighter since January 1, with super-senior bonds trading inside 90 basis points and BBB– 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 | Maximumloan-to-value | Class A | Class B |
| Multifamily (agency) | 75–80% | T +165 | T +170 |
| Multifamily (non-agency) | 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: +0.04%
Standard & Poor’s 500 Stock Index: +1.63%
NASD Composite Index (NASDAQ): –5.22%
Russell 2000: –4.85%
Morgan Stanley U.S. REIT Index: +9.93%
Year-to-Date Global CMBS Issuance(in $ billions as of 5/9/14) | ||
2014 | 2013 | |
| U.S. | $26.2 | $33.5 |
| Non-U.S. | 0.5 | 3.9 |
| Total | $26.8 | $37.4 |
| Source: Commercial Mortgage Alert | ||
Year-to-Date Public U.S. Treasury Yields
U.S. Treasury Yields | |||
12/31/12 | 12/31/13 | 5/9/14 | |
| 3-month | 0.08% | 0.07% | 0.03% |
| 6-month | 0.12% | 0.10% | 0.05% |
| 2-year | 0.27% | 0.38% | 0.39% |
| 5-year | 0.76% | 1.75% | 1.63% |
| 7-year | 1.25% | 2.45% | 2.16% |
| 10-year | 1.86% | 3.04% | 2.62% |
