The Real Estate Capital Scoreboard® – March, 2010
Chicago, Illinois, March 2, 2010 – A painfully slow rebound ignites mild excitement in select sectors of the income-property realty markets. Sparks of hope kindle the industrial and housing sectors as most investors sense the bottom is near, or within the near horizon. Choice retail properties also suggest a recovery as consumers cautiously return to stores. Office and lodging assets are bombarded with oversupply linked to shrinking demand, corporate cost-cutting and rising operating costs.
Rising defaults plaque legacy mortgage portfolios and many lenders still choice to stay on the sidelines to workout their portfolios. Banks are starting to liquidate non-performing assets. The Agencies are tightening underwriting standards across the board using more conservative income and expenses, lower leverage, high debt service coverage. Yet hope springs eternal.
Recovering from near-collapse within the past 18 months, the capital markets are ahead of overall real estate fundamentals. The most important concern? More money than funding opportunities. Will the markets return to more liberal conditions? Probably not very soon, but some positive signs surface:
- Steady fiscal policy, repayment of government bailout monies, GDP growth, reduced job losses and recovering manufacturing contribute to growing optimism.
- Overall mortgage-rate ranges start just below 180 basis points, starting to approach historical norms.
- Tightening spreads between conventional funding sources and agencies – now about 25 to 75 basis points for select apartment fundings, for instance.
- Overall interest rates and benchmark indices holding steady despite improving economic conditions and fear of inflation as noted by a mild reaction to the Fed’s increase of the emergency lending rates late last month.
- Bidding is very brisk for prime multifamily and credit-deals. Cap rates are clearly narrowing for “best in class” projects which should bode well for lesser-quality assets as investors move down the food chain.
- More lenders returning to the market including life companies, banks and even CMBS players. The level of interest is conservatively more than double seen in the past year.
- Agencies and other select sources introducing mezzanine and more structured financing as part of the capital stack – the beginning signs of improving funding terms based on higher leverage.
Jeanne Peck, of The Real Estate Capital Institute’s Advisory Board, states “Denial is now being replaced with Decision. Legacy funding sources and owners are starting to either restructure with fresh equity or liquidate. 2010 looks more like a year of action.” She predicts, “We should have a very good feel of momentum by mid-year.”