CWCapital Markets Update - March 2016

In This Issue

CWCapital introduces its Markets Update. We focus on the fundamentals and trends affecting national commercial real estate debt markets. Our approach is to synthesize and present information gathered from various industry research, public information sources, and our own research. Please see last page of this presentation for the various sources of third-party information set forth herein.


Sector Focus–Multifamily

  • Since the financial crisis, the proportion of multi-family lending shared between the securitized conduit market and the Agencies has changed dramatically. Wells Fargo research indicates that conduit multifamily loans declined from a peak of $127bn in 2007 to $59bn currently. Meanwhile, Agency CMBS in the same period increased from less than $100bn to $398bn.
  • Current delinquency rates are less than 1bp for Agencies versus 250bp for conduit loans.
  • According to CBRE, the US homeownership rate remains well below the historical average at 63.8% as of YE 2015. This rate has increased two consecutive quarters from 63.4% as of 2Q 2015.
  • With fairly consistent rent growth, high occupancies, and Agency financing support, the multifamily sector has experienced the highest appreciation rates of any CRE sector, but also the most robust building. Recent increases in vacancy rates may be worth focusing on.

For the complete commentary, stats and graphs:

The Economy

  • The unemployment rate remained unchanged in February at 4.9%. While the participation rate improved to 62.9%, it still remains below the 10-year average.
  • Job growth noted in construction, furniture manufacturing, building materials, specialty contractors, and garden stores. Maximus Ten-X notes that it is likely fueled by multi-family and residential construction trend.
  • Macro trends of low (or negative) interest rates continue with the 10 year UST finishing at 1.73%, testing 2012’s lows. Implied inflation at 1.42% continued its long-term decline, along with WTI crude also near historic lows in the $30s/bbl range.

Property Markets

  • Effective Rent Growth – National average of 3.16% experienced in property sectors with multi-family leading at 4.98% and retail lagging at 2.16%.
  • Vacancy Rates – Slight improvement in retail and office (20-40bps) to 10.00% and 16.30% respectively, however multifamily saw an increase of 20bps to 4.40%. Industrial reports the lowest vacancy rate (8.60%) since 2010.
  • Property price growth trends continued during 2015 with multifamily reaching 1.31x year-end 2006 levels. Retail, Hotel, Office, Industrial at 1.27x, 1.03x, 1.02x, and 1.12x respectively.
  • In January 2016, Moody’s / RCA reported their first decline in Office and Industrial prices in six years (1%).

Debt Capital Markets

  • Conduit originations and issuance have slowed significantly as market volatility, liquidity, and risk retention all begin to apply. Current year issuance lags 2015 comparable by nearly 30%.
  • Credit spreads on new issue long AAAs have widened by 33bp since 12/31, while BBBs have widened by approximately 225bp. Spread widening and volatility is has led some lenders to widen average loan coupons by 15 to 40bp this year.
  • Delinquency trends continue to improve, with 4.10% overall rate, less than half of 2010’s high.

Trends to Watch

  • Maturity wave and risk retention – potential for increased loan defaults as liquidity recedes from securitized markets due to risk retention, bank capital rules, and regulatory requirements.
  • Transformation of the lending base – as conduit lenders and securitized markets withdraw, could be an opportunity for new balance sheet or long-term lenders to enter the space.
  • Follow-on impacts of oil and gas price declines – impact ripples through transportation, manufacturing, consumer debt, autos, housing, commercial real estate.

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