Real Estate Research Corporation’s most recent survey of the attitudes of institutional investors shows a marked change in buy, sell, or hold responses compared with a year ago. For example, the buy percentage of investors focused on acquiring office properties in central business districts (CBDs) declined from 38 percent in the third quarter of 2012 to 20 percent in the third quarter of this year.
During the same period, the sell percentage declined from 48 percent to 40 percent and the hold percentage increased from 14 percent to 40 percent. While we admit that decoding these numbers may be more art than science, we would read the behavior of survey participants to indicate a serious shift in CBD office attitude from buying to holding. If we then layer in the suburban office category, we see the exact opposite behavior, with investors increasing their buy percentage from 25 percent to 40 percent, with the funds for acquisitions coming from the hold category.
The entire chart appears below; our preliminary take on the numbers is as follows:
- Office-CBD: large shift to holding at the expense of buying.
- Office-suburban: back from the near dead, large increase in buying at the expense holding.
- Warehouse: decreased buy-side activity combined with increased hold activity.
- Research and development: relatively unchanged.
- Flex: large increase in sale bias combined with an evenly divided decrease in sale and holding activity.
- Regional mall: relatively unchanged.
- Power centers: everybody in the pool; buying activity up, selling activity down.
- Neighborhood: relatively unchanged.
- Multifamily: less interest on the buy side; many sellers at today’s prices.
- Hospitality: the bloom seems to be off the rose, with lower buy-side interest combined with significantly higher hold activity.
Buy | Sell | Hold | |||||||
3Q12 | 3Q13 | Change | 3Q12 | 3Q13 | Change | 3Q12 | 3Q13 | Change | |
| Office-CBD | 38% | 20% | –18% | 48% | 40% | –8% | 14% | 40% | +26% |
| Office-sub | 25% | 40% | +15% | 40% | 40% | 0% | 35% | 20% | +15% |
| Warehouse | 57% | 50% | –7% | 24% | 25% | +1% | 19% | 25% | +6% |
| R&D | 25% | 21% | –4% | 38% | 36% | –2% | 37% | 43% | +6% |
| Flex | 17% | 8% | –9% | 39% | 31% | –8% | 44% | 61% | +17% |
| Regional mall | 17% | 18% | +1% | 33% | 27% | –6% | 50% | 55% | +5% |
| Power center | 11% | 21% | +10% | 33% | 21% | –12% | 56% | 58% | +2% |
| Neighborhood | 53% | 57% | +4% | 16% | 7% | –9% | 31% | 36% | +5% |
| Multifamily | 33% | 12% | –21% | 33% | 59% | +26% | 34% | 29% | –5% |
| Hospitality | 69% | 30% | –39% | 6% | 20% | +14% | 25% | 50% | +25% |
| Average | 35% | 28% | –7% | 31% | 31% | 0% | 34% | 41% | +7% |
Monday’s Numbers
The Trepp survey for the period ended October 11 showed the market unchanged as all eyes and minds were on Washington, waiting for the political drama to play out. And in the blink of an eye, it was over—neatly packaged and kicked down the road until . . . January 2014. Now we can turn our attention to the Federal Reserve, its new chair Janet Yellen, and when tapering—and the long-anticipated winding up—of quantitative easing will begin.
Asking Spreads over U.S. 10-Year Treasury Bonds in Basis Points (10-year commercial and multifamily mortgage loans for properties with 50% to 59% loan-to-value ratios) | ||||||||
12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 9/20/13 | 9/27/13 | 10/04/13 | 10/11/13 | |
| Office | 342 | 214 | 210 | 210 | 176 | 174 | 175 | 175 |
| Retail | 326 | 207 | 207 | 192 | 163 | 163 | 167 | 166 |
| Multifamily | 318 | 188 | 202 | 182 | 159 | 158 | 164 | 163 |
| Industrial | 333 | 201 | 205 | 191 | 163 | 161 | 167 | 166 |
| Average spread | 330 | 203 | 205 | 194 | 164 | 164 | 168 | 168 |
| 10-year Treasury | 3.83% | 3.29% | 1.88% | 1.64% | 2.75% | 2.64% | 2.70% | 2.70% |
The most recent Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads, dated September 9, showed spreads coming in 5 basis points during the survey period.
We expect the balance of the year to play out as follows: with interest rates expected to increase in the near future, borrowers will focus on closing committed deals as soon as possible in order to lock in today’s cheap financing. On the other hand, lenders will try to dig in their heels and not get locked in to subpar returns for up to a ten-year holding. All-in costs should range in the 4.50 to 5.00 percent range.
10-Year Fixed-Rate Commercial Real Estate Mortgages (as of September 13, 2013) | |||
Property | Maximum loan-to-value | Class A | Class B |
| Multifamily (agency) | 75–80% | T+205 | T+215 |
| Multifamily (nonagency) | 70–75% | T+215 | T+220 |
| Anchored retail | 70–75% | T+220 | T+235 |
| Strip center | 65–70% | T+240 | T+255 |
| Distribution/warehouse | 65–70% | T+220 | T+235 |
| R&D/flex/industrial | 65–70% | T+235 | T+255 |
| Office | 65–75% | T+210 | T+230 |
| Full-service hotel | 55–65% | T+270 | T+295 |
| Debt-service coverage ratio assumed to be greater than 1.35 to 1. | |||
Year-to-Date Public Equity Capital Markets
DJIA1: +17.52%
S&P 5002: +22.32%
NASDAQ3: +29.63%
Russell 20004: +31.25%
Morgan Stanley U.S. REIT5: +9.05%
1. Dow Jones Industrial Average. 2. Standard & Poor’s 500 Stock Index. 3. NASD Composite Index. 4. Small capitalization segment of U.S. equity universe. 5. Morgan Stanley REIT Index.
U.S. Treasury Yields | |||
12/31/11 | 12/31/12 | 10/18/13 | |
| 3-month | 0.01% | 0.08% | 0.04% |
| 6-month | 0.06% | 0.12% | 0.08% |
| 2-year | 0.24% | 0.27% | 0.33% |
| 5-year | 0.83% | 0.76% | 1.35% |
| 7-year | 1.35% | 1.25% | 1.98% |
| 10-year | 1.88% | 1.86% | 2.40% |
Key Rates (in Percentages) | ||
Current | 1 year earlier | |
| Federal Funds rate | 0.11 | 0.17 |
| Federal Reserve target rate | 0.25 | 0.25 |
| Prime rate | 3.25 | 3.25 |
| U.S. unemployment rate | 7.3 | 8.5 |
| 1-month LIBOR | 0.17 | 0.21 |
| 3-month LIBOR | 0.24 | 0.32 |
