TH Real Estate sees now as an opportunistic time to add CRE debt to a real estate
equity or multi-asset portfolio, “given the
abundance of lending opportunities available.” According to the firm’s researchers,
adding commercial mortgages to a real
estate equity or multi-asset portfolio during the later stages of the real estate cycle
can enhance performance by 20 to 50-plus
basis points.
Furthermore, “elevated real estate transaction volumes and commercial mortgage
loan maturities suggest the pipeline for
mortgage originations will remain strong
for the next several years,” the report
states. CRE debt maturities are expected to
average $360 billion between 2017 and
2020, virtually identical to the 2011-2016
average. And while transaction volumes for
the next several years will fall below 2015
levels, they’ll remain elevated from a historical perspective.
Along with debt, TH Real Estate also sees opportunities in
logistics, retail and alternatives. “Solid real estate fundamentals
and economic growth suggest the US real estate cycle will last
several more years,” says Melissa Reagen, managing director and
Americas head of research. “The US real estate market is in its
mature phase as characterized by slowing rent and appreciation
growth. However, real estate fundamentals remain solid with
supply and demand largely in balance. We think that CRE debt,
logistics, retail and alternatives specifically, will continue to outperform other sectors in ‘ 18.”—Paul Bubny
CAPITAL VIEW
Libor’s Successor On the Horizon
Libor, an index that underpins $350 trillion in financial contracts,
has been a benchmark for global borrowing for nearly half a century. But it will soon go the way of BOAC and the Beatles, two
British institutions that were still recent history when Libor was
devised. Will the sunset of Libor in 2021 plunge lenders and borrowers into darkness and confusion? And what will take its place?
In the view of Jillian Mariutti, director at Mission Capital
Advisors, the answer to the first question is no, since the writing
has been on the wall since the Libor manipulation scandal of
2012. As for the second question, the successor to Libor—at least
for the US market—is likely to be the Secured Overnight Funding
Rate (SOFR), which the Federal Reserve Bank of New York is
expected to begin publishing in mid-2018.
Prior to the 2012 scandal, “Libor was supposed to reflect the
actual health of the financial system,” Mariutti says. “If banks feel
confident, they report a low interest rate. But if they have a lack of
confidence, then they report a higher rate. During the crisis,
there was manipulation and collusion; banks were falsely inflating
and deflating the rate, and Libor lost credibility because it
became unreliable.”
Following the scandal, “there was no surprise that Libor as we
knew it would have to change,” says Mariutti. “We all knew it was
coming. In fact, in 2014 the Federal Reserve convened the Alternative
Reference Rates Committee (ARRC) to explore the alternatives for
replacing Libor.”
This past summer, the ARRC chose SOFR
as its preferred alternative to Libor. “It’s
going to be based on the cleared and bilat-
eral repurchase transactions of the US
Treasury,” Mariutti explains. “Put another
way, you’re basically looking at the extremely
liquid, high-volume repo market,” which
generates some $600 billion to $800 billion
in transactions daily. “Libor transactions
pale in comparison.”
Unlike Libor, an unsecured rate, SOFR
is tied to repo transactions and is a secured
rate because the Treasury serves as
collateral. “So is there going to be some
sort of adjustment to SOFR, a spread to
SOFR to make it an unsecured comp?”
asks Mariutti. “That’s still to be deter-
mined.”—Paul Bubny
SECTOR WATCH
Net Lease Cap Rates Poised to Rise
Cap rates in the net lease market went on a downward slide for
several years as the economy recovered from the recession,
with single-tenant retail properties experiencing an especially
steep decline. But the rates for all property types stabilized
about 18 months ago, and signs now point to increases in the
coming year.
In a recent national survey conducted by the Boulder Group,
a Northbrook, IL-based net lease firm, the vast majority of active
net lease participants expect cap rates to rise in 2018. According
to 39% of the respondents, rates will increase between 25 and 49
basis points by the end of 2018, and another 22% say rates will
go up by more than 50 basis points. Just 9% believe that rates
will move down.
The Federal Reserve could have a big impact in 2018. Jerome
Powell, the next Fed chairman, “is expected to continue his predecessor’s careful path toward gradually tightening monetary
policy,” according to a recent report from Chicago-based LaSalle
Investment Management.
“It’s hard to determine the exact impact of [Fed] rates other
than if they rise the cap rates will rise as well,” says Randy
Blankstein, president of Boulder. “However, the correlation is not
100% and depends on a variety of factors.”
Cap rates in the fourth quarter of 2017 for the single tenant
net lease retail sector reached a new historic low rate of 6.07%,
according to Boulder. During the same time period, cap rates for
office increased by two bps to 7.0% and rates for the industrial
sector decreased by two bps to 7.25%. Cap rates in all three sec-
tors were at their lowest point of the year.
Still, “the majority of demand remains for the higher quality
assets,” Boulder adds. But “the overall sentiment is that the market is in the late stages of the current cycle,” and many property
owners have decided to sell to take advantage of the historically
low cap rates regardless of asset quality. The number of office
properties on the market, for example, went from 408 in Q3 to
492 in Q4, a boost of 20.5%. However, with the exception of high-quality properties, most observers believe the market is no longer
seller orientated with regard to pricing, and has instead moved to
neutral.—Brian J. Rogal
Exec
Moves
CBRE has promoted Bill
Concannon to the role
of global group president of Global Workplace
Solutions. Concannon,
who has led the occupier services platform as
CEO since 2012, is one of
three senior CBRE executives with the global group
president designation.
