CWCapital Markets Update - May 2016

In This Issue

In this issue of the CWCapital Markets Update, we are focusing on the fundamentals and trends affecting national commercial real estate debt markets and a brief glimpse into CW’s experience handling REO in CMBS trusts. We synthesize and present information gathered from various industry research, public information resources, and our own research.

Featured

Sector Focus – CMBS: Increasing Value in REO

This quarter, we prepared a preliminary study of CWCAM’s experience with REO in CMBS trusts. Since 2007, CWCAM
has managed over 1,200 REO properties. Of these, over 1,000 have been sold, while some 200 are still in the process of
being resolved. The basic finding is that REO hold period and or bond loss in isolation are too simplistic to be used as
measures of economic gain or loss to CMBS trusts.

For the complete commentary, stats and graphs:

The Economy

  • The unemployment rate ticked up slightly in March to 5.0%. The participation rate improved to 63.0%, its highest level in two years, but it still remains 100bps below the 10-year average.
  • While job growth continues in construction, furniture manufacturing, building materials, specialty contractors, and garden stores (likely fueled by multi-family and residential construction), some of these gains are now offset by continuing losses in oil and gas extraction.
  • Macro trends of low (or negative) interest rates continue with the 10 year US Treasury finishing at 1.78%, testing 2012’s lows. Although implied inflation showed a small increase to 1.62% it continued its long-term decline. WTI crude improved from near historic lows to the $40s/bbl range.

Property Markets

  • Effective rent growth – National average of 2.97% experienced across all property sectors with multi-family leading at 4.49% and industrial lagging at 2.01%.
  • Vacancy rates – Multifamily saw another increase of 10bps to 4.50%. This is the highest reading in three years. The trend bears watching as robust construction and deliveries continue.
  • National property price levels on a $/unit basis showed a decline in Q1-16 across all categories except office. While interim data can be volatile, we note that 3-year multifamily price growth rates have generally been decelerating for the past year. Current month’s reading is 7.6%. Recently, Moody’s / RCA reported their first decline in office and industrial prices in six years (1% in Jan).

Debt Capital Markets

  • Conduit originations and issuance have slowed significantly this year as market volatility, liquidity, and risk retention all begin to apply. Current year issuance through April lags 2015’s same period issuance by over 30%.
  • Credit spreads on new issue long AAAs have now tightened by 15bp since 12/31, while BBBs are still some 45bp wide. Spread volatility early in 2016 has led some lenders to widen average loan coupons by 15 to 40bp this year. AAA’s have varied by 45bp, while BBBs have varied by 325bp.
  • Delinquency trends continue to improve, with 3.37% 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.
  • Early signs of softening in property markets.

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