Notwithstanding recent talk of an inflection point or a pause in transaction activity, sales of commercial property continued to increase quarter over quarter, reaching almost $90 billion for the third quarter of 2013. According to Real Capital Analytics, 2013 sales “will easily” exceed 2012’s $300 billion.
One of the key drivers of property sales continues to be a “cooperative” commercial real estate mortgage market. Lenders, facing significant cross-lending platform competition, have to keep spreads and all-in mortgage rates within a narrow band.
Who is lending where and what’s their market share? According to data from Real Capital Analytics, commercial mortgage–backed securities (CMBS) are leading across the board (except in multifamily), but the numbers may be a little misleading, as the CMBS lending platform strategy is used by a wide array of lenders to distribute mortgage loans.
Possibly more important to a borrower is a market-by-market analysis of who is lending where and their market share:
Major markets | Secondary markets | Tertiary markets | |
| CMBS | 22% | 24% | 34% |
| Financial | 8% | 6% | 7% |
| Government agency | 15% | 20% | 20% |
| Insurance | 13% | 13% | 20% |
| International bank | 12% | 5% | 7% |
| National bank | 14% | 20% | 9% |
| Regional/local bank | 13% | 9% | 11% |
| Private/other | 3% | 3% | 3% |
Monday’s Numbers
The Trepp survey for the period ending October 18, 2013, showed spreads widening 5 to 10 basis points, which, in turn, was offset by a 10-basis-point increase in yields on ten-year Treasury securities.
Asking Spreads over U.S. Ten-Year Treasury Bonds in Basis Points | ||||||||
12/31/09 | 12/31/10 | 12/31/11 | 12/31/12 | 9/27/13 | 10/04/13 | 10/11/13 | 10/18/13 | |
| Office | 342 | 214 | 210 | 210 | 174 | 175 | 175 | 181 |
| Retail | 326 | 207 | 207 | 192 | 163 | 167 | 166 | 178 |
| Multifamily | 318 | 188 | 202 | 182 | 158 | 164 | 163 | 168 |
| Industrial | 333 | 201 | 205 | 191 | 161 | 167 | 166 | 171 |
| Average spread | 330 | 203 | 205 | 194 | 164 | 168 | 168 | 175 |
| 10-Year Treasury | 3.83% | 3.29% | .88% | 1.64% | 2.64% | 2.70% | 2.70% | 2.60% |
The most recent Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads dated September 9, 2013, 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, one will see lenders trying 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 area.
Ten-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
DJIA (1): +18.82%
S&P 500 (2): +23.39%
NASDAQ (3): +30.60%
Russell 2000 (4):+31.67%
Morgan Stanley U.S. REIT (5): +9.29%
(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 | 10/27/13 | |
| 3-Month | 0.01% | 0.08% | 0.04% |
| 6-Month | 0.06% | 0.12% | 0.08% |
| 2-Year | 0.24% | 0.27% | 0.32% |
| 5-Year | 0.83% | 0.76% | 1.30% |
| 7-Year | 1.35% | 1.25% | 1.90% |
| 10-Year | 1.88% | 1.86% | 2.53% |
Key Rates (in Percentages) | ||
Current | One year prior | |
| Federal funds rate | 0.09 | 0.17 |
| Federal Reserve target rate | 0.25 | 0.25 |
| Prime rate | 3.25 | 3.25 |
| U.S. unemployment rate | 7.20 | 8.50 |
| 1-Month LIBOR | 0.17 | 0.21 |
| 3-Month LIBOR | 0.24 | 0.31 |
