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Looking Ahead – Predictions for 2017

Los Angeles – December 31, 2016 – CorAmerica CML Spreads and all-in coupon rates moved in the opposite direction throughout 2016. 10-year all-in coupon rates for a traditional 60-70% LTV 10-year loan started the year around 4.00%, declined to around 3.50% mid-year then rose to 4.15% at year end. The corresponding spreads started 2016 at 200 bps, declined to 172 bps at yearend and ranged between 172-228 bps throughout the year.

Included below are Situs RERC’s CRE predictions for 2017:
– CRE values are fully priced and values will be more moderate than they were in 2016. Values for some property types may be flat.
– Cap rate compression will stall.
– Because of long-term leases already in place, investors can expect stable rent payments in 2017.
– Economic growth will continue and inflation will increase in 2017.
– The industrial sector will continue to enjoy the largest valuations relative to price of the major property types in 2017, but the office sector has risk from a value vs. price comparison.
– Hotels and apartments are in the best position to take advantage of a growing economy to hedge out interest rate risk and capitalize on rising rents triggered by inflation.

The first two weeks of December were relatively active in conduit space, with 6 conduit deals pricing ($4.8b), although only 2 SASB deals for ~500m priced. 2016 conduit issuance will come in around $47b for the year, which is well below the almost $62b we saw in 2016. $47b is the lowest year of conduit issuance since 2012 ($32b). We also saw about a $10b drop in SASB issuance which fell from a post-crisis high of $31b last year to around $19b for 2016 (also the lowest since 2012). The conduit deals in December continued the prior month’s trend of not being very diverse, with many of the larger pari passu loans appearing in several deals. This was not unexpected as dealers were looking to start with a clean slate of loans for the post-risk retention era. Secondary spreads were generally tighter in December, although trading dropped off significantly in the last two weeks of the month. On the year, generic spreads from AAA to A- were tighter on the year, with A- performing the best. Given the heavy tiering at the BBB- level, it is tough to say whether generic BBB- tightened, but my sense is that they ended the year either side of flat. The first round of new deals should come mid-January which will help set the tone for the new year.

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Alice EricsonLooking Ahead – Predictions for 2017