CWCapital Markets Update - January 2017

In This Issue

In this issue of the CWCapital Markets Update, we focus on the fundamentals and trends affecting national commercial real estate debt markets and take an in‐depth look at the fundamentals underlying the multi‐family real estate market. We synthesize and present information gathered from various industry research, public resources, and our own research.

  • Economic strength and rising interest rates
  • Property Price growth and volatility
  • Contracting securitized markets
  • Focus on Multi‐Family fundamentals


Multi-Family Market Review and Fundamentals

As 2016, draws to a close, we review the current state of the national multi-family market and underlying fundamentals along with some factors that could influence future performance.

For the complete commentary, stats and graphs:

The Economy

  • The November jobs report saw 178,000 jobs added to the economy, with the unemployment rate falling to 4.6%, the lowest level since 2008. The participation rate reported 62.7%, still well over 100bps below the 10‐year average.
  • The Bureau of Labor Statistics notes continued job growth in financial and professional services, healthcare and construction. Average hourly earnings rose by 2.5% year over year. Industrial jobs, mining, and manufacturing were generally unchanged. This trend could change should post‐election infrastructure investments materialize. WTI continues on its upward trend since OPEC meetings and is trading in the low $50/bbl area.
  • Since the November election, 10‐year US Treasury yields have risen by over 75bps to 2.50%. Market discussion is focused on the need to finance planned economic stimulus programs and some early signs that wage growth and inflation are on the radar. Our measure of GDP growth shows a 2‐3% growth rate on average. Forward trade policy bears watching and could influence currency and interest rate trends.

Property Markets

  • Effective rent growth ‐ National average of 2.93%. Multi‐family leads at 3.89%, retail lags at 2.22%.
  • Vacancy rates – Multi‐family vacancy increased slightly to 4.60% est. This level remains the highest reading since 2012. At nearly 220,000 multi‐family units, 2016 may produce the highest level of deliveries in over 18 years.
  • National property prices report average increases in the 8% range through Q3‐16. We note above trend growth in muti‐family prices, and volatility in hotel prices which have now decelerated into negative territory on a 3yr basis.

Debt Capital Markets

  • Despite a strong 4th quarter, 2016’s $48bn conduit issuance via 56 deals lagged 2015’s issuance by 22%. We expect further declines in 2017 as risk retention and increased capital requirements now apply.
  • Credit spreads on new issue long AAAs have tightened by 44bps since the year began, with BBBs tightening by 160
    amid significant volatility this year. AAA’s have varied by 81bps, while BBBs have varied by as much as 500bps.
  • Current conduit delinquency is reported at 3.66% according to Trepp. Although this level varies, maturity wave and conduit market contraction are driving the reversal of several years of declining delinquency.

Trends to Watch

  • Maturity wave and risk retention ‐ increased loan defaults as maturities meet the securitized markets. Receding liquidity, risk retention, bank capital rules, and regulatory requirements. Overall maturity defaults (later than 90 days past maturity) spiked to over 20% in the past four periods according to Morningstar data.
  • Transformation of the lending base ‐ as conduit lenders and securitized markets withdraw, an opportunity for new balance sheet or long‐term lenders to enter the space. Second “risk retention compliant” deal priced in November, but overall, the product continues to contract and lose market share.
  • Cyclical highs in property prices ‐ national average hotel, retail, and office property prices have seen interim volatility. Multifamily valuations relative to cyclical highs, construction, and risk premium relative to benchmarks bear watching. As property values increase we see property re‐levering with less and less sponsor equity.

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