Report: Wells Fargo Capital Markets Capital Markets Outlook Panel

Liberty SBF’s Managing Director of Capital Markets and Institutional Sales, John Tomeo, attended the Wells Fargo Real Estate Securities Conference on Feb. 24 and came back with some insight into the marketplace. At the Real Estate Capital Markets Outlook Panel the Wells Fargo Securities Research Team said that they saw some good fundamentals in the office space but had concerns if rates began to rise.

On CMBS they said that overall we are at about mid-2006 debt yields of 9.8%, which has declined by 40bps in last 12 months. Back in 2007, it got as low as 8.9%. Rising rates are always a concern in the industry, especially with rates being kept at historic lows. With the wall of CMBS maturities expected over the next few years, they looked at the impact of rates at 200bps higher. The securities team at Wells Fargo said that it “changes the math and makes it more difficult to refinance. If that’s the case, with the $260 Billion in refinance coming in 2016 about 20% will be challenged.

Surveys taken of attendees at the conference revealed some interesting insights as well.

More people (56%) thought that values in commercial real estate still had room to grow versus 44% who said that it was fully priced out. More people thought that Industrial and Office properties will offer the best return in 2015, with 26% and 24% choosing those sectors respectively. Going down the list, 18% picked Hotel. 15% said Retail, 14% voted Apartments, and only 3% were bullish on the Healthcare market.

If rates rise, a whopping 43% said they’d rather own Apartments. Hotels (23%), Industrial (13%), Office (11%) and Retail (6%) were distant runners up for people who thought those property types offered the best protection in a rising rate environment. With only 3%, Healthcare bottomed out the list again.

Relative to the Fixed Income Market, almost half of respondents said that commercial real estate is fair while 37% said it was cheap. Only 14% categorized CRE as rich comparatively.

More opinions were reported in the Macro Trends Affecting Commercial Real Estate Panel. Interestingly, a majority (88%) of the attendees surveyed said that they felt foreign capital was pushing up U.S. real estate, causing it to become overvalued. More than half of those surveyed said that they expected the U.S. 10-year Treasury to be 50-100bps higher by the end of 2016. About 25% said that it would be the same.