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 a brief look at property value growth relative to NOI growth over the past few years. We synthesize and present information gathered from various industry research, public resources, and our own research.
In this report, we focus on the current property valuations relative to underlying fundamentals. Our goal is to determine whether there are broad indications of rich versus cheap valuations available in market data.
- Both office and multi‐family property types appear to be trading at significant premiums to underlying 5yr NOI growth (2x‐10x), while hotel prices (which seem to be falling) appear at closer to parity with reported NOI growth. In some cases, expenses appear to be keeping pace with rent growth. With suburban office still below pre‐crisis peaks, prices may reflect weakness still not fully priced in, while multi‐family may reflect significant assumptions about future strength and support.
- We reviewed over 38,000 properties securitized in CMBS conduit deals between 2005 and 2016 made up of 1.4tn sqft of office space, 1.6tn of retail, 861,000 hotel rooms, and 1.9mm multifamily units. We analyzed reported NOI and appraisal per unit for each property at securitization. Since post securitization appraisals are not always available, the comparisons are based on the implied national per unit metrics calculated for each individual asset class.
- The analysis has inherent limitations including that it is based on aggregate and average data. Aggregates don’t always work for specific properties, however, some indications are useful. Valuation for any individual property depends on unique facts and circumstances. Property comparisons can be influenced by asset mix in any vintage, as well as selection bias such as the shift away from conduit financing to agency financing in the mult‐family sector.
For the complete commentary, stats and graphs:
- October saw 161,000 jobs added to the economy, just below analyst estimates. The unemployment rate remained at 4.9% and the participation rate remained steady at 62.8, still well over 100bps below the 10‐year average.
- The Bureau of Labor Statistics notes job growth in healthcare, financial, and professional services. Average hourly earnings rose by 2.8% year over year. Jobs in mining, manufacturing, and construction were unchanged. This trend could change should post‐election infrastructure investments materialize. WTI remains mid $40/bbl range.
- Since the November election, 10‐year US Treasury yields have risen by over 60bps to 2.35%. Market discussion is focused on the need to finance planned economic stimulus programs and some early signs that wage growth and increased inflation are beginning to appear. Our measure of GDP growth shows an annualized 3%+ growth rate on average. Forward trade policy bears watching and could influence currency and interest rate trends.
- Effective rent growth ‐ National average of 2.83%. Multi‐family leads at 4.19%, retail lags at 2.06%, both slowing.
- Vacancy rates ‐ Multifamily vacancy fell slightly for the quarter, equaling 2015’s year end of 4.50%. This level remains the highest reading in three years. We note that new deliveries seem to have slowed slightly relative to 2015’s record pace, however 2016 still looks like it will produce the second highest level of deliveries in 15 years.
- National property prices report average increases in the 5% area for Q3‐16. We note several months of declines and volatility in hotel prices and double digit growth in muti‐family prices. The 3‐year growth rates for hotels have now decelerated into negative territory. Some market participants note curtailed hotel lending for many hotel properties.
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 as of October lags 2015’s same period issuance by 37%.
- Credit spreads on new issue long AAAs have now tightened by 45bps since the year began, with BBBs tightening by 150 amid significant volatility this year. AAA’s have varied by 80bps, while BBBs have varied by as much as 400bps.
- Current conduit delinquency is reported at 3.62% 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 ‐ potential for increased loan defaults as liquidity recedes from securitized markets due to risk retention, bank capital rules, and regulatory requirements. Overall maturity defaults (later than 90 days past maturity) spiked to 18%‐20% in the past quarter according to Morningstar data. More to come.
- 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.
- Volatility in property prices ‐ national average hotel, retail, and office property prices have seen interim volatility. Multifamily valuations relative to highs, construction, and risk premium relative to benchmarks bear watching.
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