Is Wednesday the new Friday? It was last week as the real estate capital markets tried to start the Memorial Day weekend just a few days early. And why not? The first five months of 2014 have been everything one could wish for: Equity and debt have been available in size and at favorable rates and spreads; transaction volumes have increased across all sectors and markets; fundamentals continue to improve, and so on. So, all in all, it was a very quiet week; the question is whether market participants will look for an “extender” next week, or will it be back to business?
It Had to Happen Eventually: “CMBS 2.0” Suffers First Defaults
The new generation of commercial mortgage–backed securities (CMBS), referred to in industry parlance as “CMBS 2.0,” has seen its first defaults. According to Fitch Ratings, six conduit loans with a total balance of $54.1 million and three loans in agency transactions totaling $20.8 million went more than 60 days past due. Seven of the defaults were in the multifamily sector; two were in the office sector. An analysis of the individual defaults shows that the causes were “financially challenged” borrowers or (major) tenant bankruptcies.
According to Fitch, the risk of term defaults for recent CMBS vintages remains low. In its report, the rating agency noted that “due to the low interest rates of the loans originated in CMBS 2.0, balloon [payment] risk remains the bigger concern. If interest rates are substantially higher at maturity, loans originated with higher loan-to-value ratios may have difficulty refinancing unless there is some appreciation in cash flow or meaningful [loan] amortization.”
Monday’s Numbers
The Trepp survey for the week ended May 16 showed spreads unchanged with the implied ten-year commercial real estate mortgage rate for pristine, institutional properties at +/–4.00 percent. Since January 1, the yield on ten-year U.S. Treasuries had declined 52 basis points while the average loan spread has come in 21 basis points. This seems rather remarkable as we are operating in an environment where everyone is talking about when the Federal Reserve will increase interest rates.
Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points | |||||||
12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 12/31/13 | 5/16/14 | Month earlier | |
| Office | 342 | 214 | 210 | 210 | 162 | 147 | 154 |
| Retail | 326 | 207 | 207 | 192 | 160 | 139 | 144 |
| Multifamily | 318 | 188 | 202 | 182 | 157 | 135 | 138 |
| Industrial | 333 | 201 | 205 | 191 | 159 | 136 | 141 |
| Averagespread | 330 | 203 | 205 | 194 | 160 | 139 | 144 |
| 10-yearTreasury | 3.83% | 3.29% | 0.88% | 1.64% | 3.04% | 2.52% | 2.65% |
The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads, dated May, showed spreads coming in 5 basis points across the board.
Ten-Year Fixed-Rate Commercial Real Estate Mortgages (as of May 9, 2014) | |||
Property | Maximum loan-to-value | Class A | Class B |
| Multifamily (agency) | 75–80% | T +165 | T +170 |
| Multifamily (nonagency) | 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: –0.20 percent
Standard & Poor’s 500 Stock Index: +2.39 percent
NASD Composite Index (NASDAQ): –0.53 percent
Russell 2000: –4.28 percent
Morgan Stanley U.S. REIT Index: +12.84 percent
Year-to-Date Global CMBS Issuance (in $ billions as of May 23, 2014) | ||
2014 | 2013 | |
| U.S. | $29.5 | $37.4 |
| Non-U.S. | 0.5 | 3.9 |
| Total | $30.0 | $41.3 |
| Source: Commercial Mortgage Alert | ||
Year-to-Date Public U.S. Treasury Yields
U.S. Treasury Yields | |||
12/31/12 | 12/31/13 | 5/23/14 | |
| 3-month | 0.08% | 0.07% | 0.04% |
| 6-month | 0.12% | 0.10% | 0.05% |
| 2-year | 0.27% | 0.38% | 0.37% |
| 5-year | 0.76% | 1.75% | 1.55% |
| 7-year | 1.25% | 2.45% | 2.09% |
| 10-year | 1.86% | 3.04% | 2.54% |
