Los Angeles – Jan. 31, 2017 – There are trends in each property sector worth noting. Class A apartments have experienced higher scrutiny from buyers, including increased cap rates in some cases. New supply remains a concern in the Class A space. Class B and C properties are outperforming with higher rent growth and a more consistent acquisition/valuation market. Medical office has been a bright spot in the office sector achieving over 50% higher demand growth, according to CoStar Portfolio Strategy. The average U.S. medical office vacancy rate of roughly 8% is well below the overall office vacancy rate in all but a few high-construction metros such as San Francisco and Nashville, according to CoStar data. CBD office has maintained higher liquidity, partially driven by foreign buyers, but gateway markets may be seeing rent growth and cap rates flattening. The retail market is focused on providing services and experiences to the consumer with continued pressure on soft goods retailers which are more susceptible to ecommerce. The fourth quarter capped off the end of the second-strongest 12 months for logistics absoprtion ever seen in the CoStar National Index, which may be fueled by the needs associated with ecommerce companies. The light industrial market continued to post consistently low vacancy rates of 3.3%. Both industrial subsectors remain extremely healthy with underlying trends focused on ecommerce, futurer impacts associated with trade agreements and technology affecting the way materials are stored.
Included below is CBRE’s view of the debt markets:
Commercial real estate capital markets remain deep and liquid across most asset types, but we have seen different market reactions from different lender types. Life insurance companies are the least impacted by rising rates, in large part due to their relatively low loan-to-value (LTV) requirements compared with other lender types. Most life company floor rates have disappeared, and they’re much more willing to lend in a higher interest rate environment and at this time of year with fresh allocations of capital. Some life companies have lowered spreads by 5-to-10 bps, but until competitive pressures return in abundance most will likely hold spreads constant. Bank rates and spreads have not been materially impacted by the rising 10-year Treasury either, due to the LIBOR-based lending that is typical of banks. Construction loans remain very difficult to obtain, and likely will be for the foreseeable future. The most-impacted by rising rates are the full LTV lenders: agency (Freddie Mac and Fannie Mae) and CMBS lenders. For full agency loans, we have seen proceeds cut by up to 5% due to debt-service coverage constraints. Non-bank financial institutions have been able to fill some of this funding gap, albeit at higher cost.
January is typically a light month for CMBS new issue (given the timing of the annual CMBS conference) and with the additional supply constraints related to risk retention implementation, we only saw one conduit ($1.3b) and one SASB borrower deal (365mm) price in January. By comparison, 3 conduits ($2.7b) priced in January 2016. The conduit deal was not particularly strong from a collateral perspective but priced well anyway given the pent up demand in the market and the risk retention structure. The deal has the first “L-shaped” risk retention structure which meant both the b-piece buyer (holder of below IG classes) and the issuer (via a vertical strip) satisfied the risk retention requirement together. Prior test deals had only utilized the vertical strip. There was adequate demand for the deal but away from the BBB- tranches, subscription was not as high as we have seen with prior high quality deals, which implies that tiering will not be totally lost in the new risk retention era. In secondary, spreads ended the month tighter across the board although AAA spreads ended the month well off the tights following heavy selling in last two weeks of the month. Mezz bonds did nothing but ratchet in tighter all month, with BBB- outperforming and ending the month anywhere from 40-85bps tighter for some names causing the credit curve to flatten. A- bonds were anywhere from 10-40 bps tighter with AA- bonds tighter by 10-20bps. Weaker names outperformed across the board causing the tiering curve to flatten substantially within rating categories. Supply is expected to pick up in February but the demand for mezz should help keep spreads in check.
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