Commenting on the fact that regulators would not require residential mortgage bankers to keep a minimum share of all but the safest loans on their books post-syndication, former congressman Barney Frank, coauthor of the Dodd-Frank financial industry legislation, was quotedin the New York Timesas saying: “The loophole has eaten the rule, and there is no residential mortgage risk retention.”
Monday’s Numbers
The Trepp survey for the week ending October 24, 2014, showed average spreads basically unchanged, with the implied rate for ten-year, modestly leveraged commercial real estate mortgages equaling 3.74 percent—70 basis points lower than at year-end 2013. Absent an ”event”—political, social, economic, climatic, or otherwise—we expect to see very little movement in rates and spreads between now and year-end as the focus remains on “getting deals done.” Borrowers with 2015 needs will just have to wait their turn.
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 (10/24/14) | Last week (10/17/14) | Month earlier | |
| Office | 214 | 210 | 210 | 162 | 151 | 149 | 132 |
| Retail | 207 | 207 | 192 | 160 | 144 | 140 | 130 |
| Multifamily | 188 | 202 | 182 | 157 | 139 | 137 | 127 |
| Industrial | 201 | 205 | 191 | 159 | 144 | 140 | 127 |
| Average spread | 203 | 205 | 194 | 160 | 145 | 142 | 129 |
| 10-year Treasury | 3.29% | 2.88% | 1.64% | 3.04% | 2.29% | 2.22% | 2.42% |
The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads dated October 8, 2014, confirmed a trend note by some analysts over the past month, which is that spreads for “bread and butter” type mortgage loans—ten-year terms with 1.25-to-1.00 debt-service-coverage ratios for properties located in noncore, nongateway markets—are “coming in.”
While you might intuitively think just the opposite—i.e., noncore should pay more—noncore is now also benefiting from the combination of continuing improvements in fundamentals, capital availability (at historical highs), and less product available to finance than the industry’s appetite for deals. So, while lenders more further up the risk ladder, competition is forcing spreads to become more competitive.
Year Fixed-Rate Commercial Real Estate Mortgages | |||
Property | Maximum loan-to-value | Class A | Class B/C |
| Multifamily (agency) | 75–80% | T +160 | T +170 |
| Multifamily (nonagency) | 70–75% | T +170 | T +165 |
| Anchored retail | 70–75% | T +185 | T +195 |
| Strip center | 65–70% | T +185 | T +195 |
| Distribution/warehouse | 65–70% | T +185 | T +195 |
| R&D/flex/industrial | 65–70% | T +190 | T +200 |
| Office | 65–75% | T +180 | T +190 |
| Full-service hotel | 55–65% | T +245 | T +265 |
| Debt-service-coverage ratio assumed to be greater than 1.35 to 1. | |||
Year-to-Date Public Equity Capital Markets
Dow Jones Industrial Average: +4.91 percent
Standard & Poor’s 500 Stock Index: +9.18 percent
NASD Composite Index (NASDAQ): +10.87 percent
Russell 2000: +0.85 percent
Morgan Stanley U.S. REIT Index: +16.39 percent
Year-to-Date Global CMBS Issuance (in $ billions as of 10/31/14) | ||
| 2014 | 2013 | |
| U.S. | $77.0 | $67.5 |
| Non-U.S. | 3.7 | 10.3 |
| Total | $80.7 | $77.8 |
| Source: Commercial Mortgage Alert. | ||
Year-to-Date U.S. Treasury Yields
U.S. Treasury Yields | |||
| 12/31/12 | 12/31/13 | 10/31/14 | |
| 3-month | 0.08% | 0.07% | 0.01% |
| 6-month | 0.12% | 0.10% | 0.05% |
| 2-year | 0.27% | 0.38% | 0.50% |
| 5-year | 0.76% | 1.75% | 1.62% |
| 7-year | 1.25% | 2.45% | 2.05% |
| 10-year | 1.86% | 3.04% | 2.35% |
