Monday’s Numbers: November 25, 2013

What kind of a year will 2013 turn out to be? All in all, a pretty good one. Capitalization rates have fluctuated in a narrow band all year, with no sign of a breakout or a breakdown. While the race between the path and direction of cap rates, interest rates, and growth in net operating income appears to be postponed until 2015, an improving economy—combined with improving real estate fundamentals—may mean that the race will not need to be run.

Transaction volume appears on a path to exceed 2012’s, with only the multifamily and hotel sectors underperforming. All of the other sectors seem to be selling well, recording significant increases in transaction volume.

Equity needed to fund acquisitions appears available in size and willing to support literally any investment strategy; the same thing can be said about the availability of debt capital. Commercial mortgage–backed security (CMBS) issuance is on track to have dominated the debt market in 2013, with the likelihood of repeating in 2014.

Monday’s Numbers

The Trepp survey for the period ending November 15, 2013, showed spreads mixed, widening for multifamily and industrial, neutral for retail, and narrowing for office. Significant change remains unlikely before year-end unless an event overtakes the market. A basis point here, a basis point there as the markets focus has turned to closing deals by year-end. Absent an event of some kind, we should expect spreads to stay within a narrow band through year-end 2013.

The most recent Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads dated November 4, 2013, showed spreads coming in 15 basis points during the survey period.

Applying an average spread of 200 basis points, borrowers are looking at all-in costs of about 4.75 to 5.00 percent for fixed-rate mortgages with a 70 to 75 percent loan-to-value ratio. These spreads must be attractive to both borrowers as well as lenders as the Mortgage Bankers Association recently reported that third-quarter commercial/multifamily origination volume was up 29 percent, year over year. The increase in origination volume was led by CMBS whose volume increased 105 percent year over year, followed by life insurance companies with a 72 percent increase year over year.

Year-to-Date Public Equity Capital Markets

Dow Joes Industrial Average: +22.59%

Standard & Poor’s 500 Stock Index:+26.54%

NASDAQ: +32.20%

Russell 2000 ⁽¹⁾:+32.44%

Morgan Stanley U.S. REIT Index: 0.00%

^{(1) Small-capitalization segment of U.S. equity universe.}