Monday’s Numbers: September 8, 2014

The Real Estate Roundtable recently distributed the results of its highly regarded quarterly survey of the industry’s temperature. Readers interested in reading the entire survey may download it from the Roundtable’s web site.

Why do we like this survey and think it has value? It’s short; only five or so questions with space if participants wish to express their views in writing. Comments received are summarized, edited, and included in the survey results.

Some topline findings:

• Overall, the index increased slightly, reflecting participants’ confidence in a continuing recovery in the U.S. economy as well as increasing allocations of capital to the real estate industry. Participants remain concerned about some policy issues.
• While interest rates are on everyone’s mind, participants did not expect a significant or rapid increase in rates over the next 12 months.
• Asset values are expected to remain relatively flat as increased interest rates and increases in net operating income (NOI) and property fundamentals battle to a draw.
• Liquidity is not expected to be an issue; equity and debt capital will remain abundant.

In regard to asset values, one participant’s comments seem to summarize what’s on everybody’s mind: “Will rent growth match or exceed interest rate growth? That is the million-dollar question.”

In regard to capital markets, participants expect today’s high levels of liquidity in both the equity as well as debt markets to continue unabated. Common were comments such as: “The pendulum has clearly swung in favor of the borrower”; “The market continues to be flush with plenty of inexpensive debt and equity looking for a home”; and “Let the games begin . . . due to low rates we currently have an abundance of capital versus sanity.”

The current euphoria notwithstanding, the yellow caution flag was also sighted, with one participant’s comments reflective of the views of many participants as they relate to financing and refinancing: “Strike now while the iron is hot; we have aggressive rates and underwriting terms. The risk into next year is concern about interest rate hikes and their adverse impact on valuations and leverage.”

Monday’s Numbers

The Trepp survey for the week ending August 29 showed average spreads literally unchanged. The implied rate for ten-year, modestly leveraged commercial real estate mortgages remained at 373 basis points, 81 basis points lower than at year-end 2013.

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The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly Capital Markets Update of commercial real estate mortgage spreads, dated August 7, showed spreads coming in approximately 5 basis points as compared with the prior survey (dated June 10) as lenders continue to compete for business; implied all-in cost ranges from 4.25 to 4.50 percent.

Year-to-Date Public Equity Capital Markets

Dow Jones Industrial Average: +3.38 percent

Standard & Poor’s 500 Stock Index: +8.62 percent

NASD Composite Index (NASDAQ): +9.73 percent

Russell 2000: +0.56 percent

Morgan Stanley U.S. REIT Index: +16.61 percent

Year-to-Date U.S. Treasury Yields