CRE Market Stable According to Feds [News] | Liberty SBF Bridge Loan Rates
In its recent report on current economic conditions, the Federal Reserve said activity in the CRE market “remained stable to expanding across many Districts.” The Beige Book, an anecdotal report on economic conditions collected by the Federal Reserve’s Districts and published eight times a year, showed that CRE loan demand was strong in Atlanta and Dallas and was stable in Philadelphia and Kansas City. Demand for commercial and industrial loans grew slightly in St. Louis and Kansas City, while exhibiting stronger growth in New York, Philadelphia, Cleveland, and Chicago. Demand for commercial properties in the city of Boston continued to be fuelled by foreign institutional investors. Chicago also reported that leasing of industrial buildings, office and retail space all increased. The report goes into further details about market conditions in individual Districts.
A new report showed that the “two broadest measures of U.S. commercial property pricing, the value-weighted and the equal-weighted U.S. Composite Indices, gained 1.5% and 1.4%, respectively, in February,” according to CoStar’s Commercial Repeat Sale Indices report. This continues a broad recovery across all property types that reflects “solid occupier demand as well as widening investor interest in smaller properties outside the largest U.S. metros.”
Hotel property transactions and pricing are expected to continue on their present upward trend, according to an article in Globe St. “Record sums are being routinely paid in many US metropolitan areas for desirable lodging assets driven in some measure by low interest rates that have prevailed since the mid 2000s,” the article states. Investment demand is high from private and institutional capital throughout the country targeting hotel properties on both coasts as well as major cities in the Midwest. Buyers and sellers of hotels are taking advantage of strong demand and pricing to re-shape their portfolios. Sellers have been motivated by a wide variety of strategies including “monetizing on rising values to bake in gains, de-lever balance sheets, and recycling capital to fund new investments.”
Retail sales saw their biggest boost in a year, according to an article on Bisnow. Last month, retailers saw sales rise a surging 0.9% in the U.S. That was the biggest jump in 12 months and put aside any fears that a slow first quarter would continue for retailers across the country. Also, the commerce department report revised February’s figures to a 0.5% rather than a 0.6% decline. This news “increased the odds of an interest rate hike later this year”
Rick Sharga, EVP of Auction.com, commented on the trend in urban retail spaces driven by Millennials moving into cities, in an interview on Globe St. These retail units are being plucked up by investors and Sharga said, “We’re probably seeing people take advantage of prices on retail assets not rising as quickly as in some other sectors and extremely favorable cap rates for entering the market now. Also, investors are cherry-picking prime locations or types of businesses likely to be more successful in today’s economy, like food, entertainment office, and even residential opportunities in what had been strictly retail in the past. We’re seeing the conversion of retail into other, more profitable uses.”
Further support of the trend came from a recent Walk Score Commercial Property Price Indices (CPPI) report released by Real Capital Analytics (RCA), a research firm. The report supports the generally accepted idea that CRE in “walkable” locations… get premium pricing from tenants and real estate investors,” according to a story in National Real Estate Investor. They parsed the data and showed that “prices for assets in walkable Central Business Districts (CBDs) rose 125 percent over the past 10 years, while prices for assets in walkable suburban locations rose 43 percent (the increase for less pedestrian-friendly suburban sites was about half of that for the same period).”
CRE Economic Report and Property Sector News You Need To Know | CMBS and Bridge Loan Rates From Liberty SBF
CRE Economic News
Standard & Poor’s has seen its volume of business double since the SEC banned it from rating some commercial mortgage-backed securities. S&P rated $8.7 billion in transactions up to March of this year, which is up from $3.9 billion a year earlier and $7 billion in the previous period, according to data compiled by Commercial Mortgage Alert. What’s going on here? According to an article on Bloomber.com, there has been a surge in issuance of single borrower CMBS, the kind that the ban doesn’t apply to and the type that S&P has been the largest grader anyway. “Wall Street created the most securities of the type since the financial crisis last quarter, with volumes more than doubling,” reported the news agency. Morgan Stanley analysts Richard Hill and Jerry Chen wrote this week in a report that the market is on track for “robust issuance growth” in 2015.
In that vein, the S&P reported that as the volume of single-borrower CMBS issuance has gone up, so have loan-to-value ratios and credit enhancements, according to GlobeSt.com. There is also a shift toward interest-only loans. “Full-term IO loans have become par for the course in single-borrower deals in recent years,” according to S&P. “All 14 of the Standard & Poor’s-rated offerings in the first quarter were backed by full-term IO loans.”
Foreign investors looking to invest in commercial real estate here in the U.S. don’t necessarily have to bring boatloads of cash to the table. Banks have been willing to extend financing to foreign investors lending institutions have become more comfortable underwriting their credit risk, according to a story on Gloest.com. Foreign investors have gotten used to having to pay in cash but some are seeing the advantage financing debt to lock in low rates and leverage their equity.
The dollar’s surge could delay the Fed’s decision to raise rates, said The LA Times. The dollar’s “steep ascent against many of the world’s currencies since last summer” could help delay the first Federal Reserve rate hike since 2006 that could affect mortgage and other long-term rates. Under Chairwoman Janet Yellen, the Fed has made clear that the dollar is on their minds as they consider what to do with rates. A few months ago, many economists expected the Fed to begin raising its benchmark short-term rate in June from near-zero levels. Now most analysts doubt that the Fed will order its first increase before fall. “The move in the dollar has been so big they can’t ignore it”, said Ethan Harris, co-head of global economics at Bank of America Merill Lynch. “They have to think about the shock to the economy.”
Property Sector News
Office occupancy has hit an all time high in the U.S., according to an article on City Biz List. A report by CBRE Research Group showed that annual tenant demand, measured by net absorption, totaled 52.7 million square feet in 2014—the highest annual amount since 2007. Downtown markets across the country saw their highest annual total since 2006 with 21.1 million square feet of positive net absorption. Colin Yasukochi, Director of Research at CBRE said that “the short term outlook is for high tech, financial services and government to be the most active industries leasing office space. As supply is slow to respond to this growing demand, tenants can expect to see rising occupancy costs, which will compel many to consider ways to achieve more efficient footprints through workplace strategy, or to explore lower cost sub-markets.”
Retail’s recovery is gradually gaining traction. Part of that reason is because of the state of the labor market in the U.S. Chief Economist at REIS, Ryan Severino, says “2015 could be the best year for labor market performance since the late 1990s. The quality of the jobs being created continues to improve which means higher incomes and higher income growth. Cheap energy prices should continue to be a boon for most consumers as they adjust their behavior to correspond with structurally lower oil prices in addition to structurally lower natural gas prices.”
Self-storage is a sector that’s starting to attract new investors, according to CEO of Smart Stop Self Storage Jeff Schwartz. Schwartz says that self-storage has had a very solid run from the Great Recession to where we are today. “We saw very strong overall NOI growth on top-line and smaller regional operators and saw some positive trends. In 2015, we see nothing but overall strength in the self-storage market,” he said. Development in self-storage is also picking up, but will not really affect the sector in 2015 or 2016. The fundamentals of self-storage are strong, there are high occupancies and the larger platforms in bigger companies are good. This positive performance from the sector is starting to draw more interest from everyone from private equity shops to public companies.
Hotels deals will see more growth in 2015 thanks to the improving “economic fundamentals and limited new supply coming on line,” according to an article on GlobeSt.com. Lodging Econometrics predicts that sales transaction volume for lodging properties will continue growing for at least the next three years. Trailing twelve month RevPAR growth has been positive for 54 consecutive months as of February and Fitch expects further RevPAR gains over the next two to three years based on its review of the key lodging cycle leading indications.
8+1 (That’s 9) Stories You Need To Read In CRE Right Now
Bridge Loans and CMBS Rates from Liberty SBF | See Us At The Next CRE Conference
Ratings agencies are getting tough on CMBS underwriting because they say that the loans are getting too big compared to values. That might end up pushing rates higher, according to an article in National Real Estate Investor magazine.
“Most conduit lenders only make loans that feature loan to value (LTV) ratios of 75 percent or less. That would normally leave lots of room between amount of the loan and the value of the property,” reported the site.
But that doesn’t stand up to stress tests done by the top ratings agencies and it has them worried, along with other factors like rising rates cutting into debit-service ratios and interest-only loans.
On the other hand, Reuters reported “U.S. CMBS loan defaults dropped for the fourth consecutive year and to their lowest level since 2008, according to Fitch Ratings in its annual U.S. CMBS loan default study.”
And also according to Reuters, the U.S. Economy stalled in Q1. (Though many attribute this to the weather.)
“The U.S. economy barely grew in the first quarter as exports tumbled and businesses accumulated stocks at the slowest pace in nearly a year, but activity already appears to be bouncing back,” the news service wrote.
Non-bank lenders are stepping in where banks dare not go in the CRE market, according to the Wall Street Journal.
The pool of lenders that includes REITS, investment funds and others filling a “void left by a banking sector that has grown averse to chancy bets: mortgages on riskier investments such as skyscraper construction, ailing malls and high-vacancy office buildings…”
Call Liberty SBF at (877) 977-8028 or email us for more information on Bridge or CMBS loans.
Did You Hear Us Speak At Bisnow?
Liberty SBF is on the move. We were just at Bisnow in Phoenix and Austin talking on panels about commerical real estate and capital markets. We also were in New York City for the Retail Real Estate Summit and hopped over to Houston for RealShare. All in one week!
Did you miss us? Don’t worry. We’re heading to plenty of others. Here’s our schedule:
May 5 – 7: Meet the Money Hotel Conference, Los Angelas, CA. May 6 – 8: Crittenden, San Diego, CA. May 6 – 8: NAGGL, Bonita Springs,FL. May 13 – 14: Bisnow BLIS (Hospitality), Washington D.C. May 22: Bisnow BMAC West, Los Angelas, CA. May 29: Realshare’s New Jersey Breakfast.
Call Liberty SBF at (877) 977-8028 or email us to meet up at the next conference or to talk about your next CRE loan.
CMBS Rates and Market Commentary – FOMC Meeting and the 10-Year Treasury
Amid fear over Russia’s intervention in Ukraine, 10-year Treasury yields fell on Tuesday, down to 2.67% even though President Vladimir Putin said that he wasn’t planning to send more troops into the region. Experts said the bond was still trading within range and that “violence would have to escalate for Treasurys to move significantly higher.”
The Federal Open Market Committee held its first meeting led by Janet Yellen.
“The mix of economic data hasn’t given the Fed much room to diverge from its current path,” said Alex Cohen, Liberty SBF CEO. “We fully expect the Fed to stay the course on both rates and bond-purchase reduction to $55-billion per month. The phrasing of forward guidance seems as important as anything else coming out of this meeting.”
After that meeting, Yellen’s conference moved markets. The new Chairwoman’s response to questions about when the Feds expect to move rates was a little too transparent.
“You know, this is the kind of term it’s hard to define, but, you know, it probably means something on the order of around six months or that type of thing,” she was quoted as saying in Bloomberg. The news website said that the timeframe was “a bit quicker than markets had been expecting, so interest rates rose and stocks fell.”
The comment “sent equity markets into something of a tailspin,” wrote Paul Ashworth of Capital Economics. The 10-year treasury opened at 2.78% on Thursday.
Unemployment rose to 6.7% in February and in the past the Fed has said that it will keep rates low well past the time when that rate drops below 6.5%.
Recent indicators include the National Association of Home Builders Index for March, which came in at 47 but less than an expected 50, although it was up from 46. Weather and a shortage of lots is what builders say is impacting the market.
The Fed reported that “Industrial production increased 0.6% in February after having declined 0.2% in January. In February, manufacturing output rose 0.8% and nearly reversed its decline of 0.9% in January, which resulted, in part, from extreme weather.” Capacity utilization for total industry increased in February to 78.8% and factory capacity rose to 76.4 from 75.9.
Weather seems to have a continued impact on business.
GlobeStreet reported that “Trepp LLC has stated the late-pay rate for securitized commercial mortgage loans at 6.78% for February, a 47-bps drop and the ninth consecutive month this rate has declined. It marked the first time the delinuency rate had fallen below 7% since February 2010. Among Fitch-rated CMBS, the delinquency rate fell 46 bps to 5.43%, its lowest level in five-and-a-half years.”
Commercial Mortgage-Backed Security Loans (CMBS) Weekly Rate Sheet 3/20/2014 Non-Recourse loans for Limited Service Hotels, Office, Industrial, Retail, Multifamily. (As low as $3 Million)
Current Rates 4.64% I 5 YEAR FIXED 5.29% I 10 YEAR FIXED
Term 5-10 year term 25-30 year amortization
Loan Parameters • Up to 65% LTV on hospitality transactions. • Up to 70% LTV on conventional commercial real estate acquisitions and refinances. • DSCR > 1.45x
This unexpected downward push after 2013 ended on a positive note has tested the low side range of the benchmark bond yields. Economists predict a range between 2.62 – 2.85% over the next month or so.
Stormy weather throughout the U.S. in the last coupled of months might be a major factor influencing the data as much as any dark clouds on the economic horizon.
“Early reports for January suggest that poor weather disrupted the operations of manufacturers and the problems may have carried over in the February,” reported MarketWatch.
Jobs may also get back into the picture as the CBO minimum wage report showed that if raised to $10.10 as President Obama wants, it will cost 500K jobs. On the other hand the CBO says the hike will lift incomes for 16.5 million people. Read more on Washington Post’s Wonkblog.
With news coming out on Wednesday and the FOMC minutes expected to be mostly positive despite the recent slate of disappointing jobs reports and housing numbers. If so, 10-year treasuries could stick around 2.75%.
Looking ahead and making predictions on where the 10-year will be by year’s end, Michael Fratantoni, MBA chief economist and senior vice president, said he expects yields to be at 3.3% by the end of 2014 and at 3.5% by Q4 2015, according to Multi-Housing News Online.
Commercial Mortgage-Backed Security Loans (CMBS)
Weekly Rate Sheet 2/19/2014
Non-Recourse loans for Limited Service Hotels, Office, Industrial, Retail, Multifamily. (As low as $3 Million)
4.60% I 5 YEAR FIXED
5.32% I 10 YEAR FIXED