The Real Estate Capital Scoreboard – June 2009

Chicago, Illinois, June 1, 2009 – Late spring realty capital markets are starting to show more signs of life, although caution is the word. The agencies continue to provide liquidity to the multifamily markets, while banks and life companies cherry-pick commercial property loans.

Focal market dynamics include the following:

• Building activity is winding down to trickle levels, particularly in office and commercial construction which includes multi-tenant retail space. The economic downturn and tight credit conditions dampen any prospects for non-residential construction, at least for the next couple of years as oversupply imbalances prevail. Moreover, lower prices for commercial real estate as acquisitions are much more viable than development.
• Bank stress tests are succeeding in mildly boosting confidence by persuading investors that no more major negative news is on the horizon. In fact, many banks scored higher than expected.
• Credit remains tight as a lack of confidence plagues bond ratings. Investors still feel that the Rating Agencies are miscalculating risk with more defaults on the horizon.
• By historical standards, real estate debt pricing is still very widely priced in comparison to treasuries. Highest-grade corporate bonds are trading as low as 100 to 200 basis points and average investment-grade corporate debt is priced in the 450 basis point range. Meanwhile, the most favorable pricing for multifamily properties is below 300 basis points; commercial properties start at 450 basis points reflecting the perceived tenancy risk for that type.
• As treasury yields spiked upward most of the month, some lenders are holding down, or reducing spreads by 20 to 30 bps, to maintain reasonable levels of loan production for the highest-quality properties.
• More assets are repriced and lenders are unloading impaired legacy assets at discounts of 30% or more. More assets are expected to enter the market during the remainder of the year as valuation and mark-to-market issues are synchronized.

According to Jeanne Peck, an advisory board member of the Real Estate Capital Institute, "sellers without a dire need to for immediate liquidity are taking a ‘wait and see’ position. Today’s indecision could lead to tomorrow’s panic to sell against upcoming CMBS and bank loan maturities without refinancing options.”

Contact Information

Nat Zvislo

Research Director

The Real Estate Capital Institute®

Contact via E-mail