External Affairs Alert – February 2013 – Capital Markets Outlook

Capital Markets Further Unlocked in 2013


  • Right-10: CMBS property delinquencies remaining below 10%;
  • Left-250: The 10-Year Treasury not rising above 2.5%;
  • Right-150: Aggregate new office, industrial and retail new construction  remaining below 150msf;
  • Left-6:  Average Cap rates for Class A commercial real estate assets in core MSAs not rising above 6% as interest rates rise in 2H2013 with the end of the Bernanke FED; and
  • Right-200: The housing recovery remaining intact with 200 plus MSAs remaining on the NAHB Improved Housing Markets Index.
  • Left-75: New CMBS issuance climbing out of the under $50 billion doldrums and rising to at least $75 billion.

Capital and Property Market Conditions are presenting “The Combination” to unlock Capital Markets even further in 2013.

What is better than improving property type fundamentals to open up the capital markets to commercial real estate?  The answer for those that purchased any of the 10,000 plus investment-grade office, industrial and retail properties that traded in 2012 is availability of capital.  Domestic and foreign sources of capital are flush with liquidity ready to invest in tangible assets, like real estate, that can offer 2.5x to 3.0x the yield offered by the U.S. government’s 10-Year Treasury bond (ended 2012 at approximately 1.9%).

Debt Markets Poised to be Life of the Party in 2013

The CMBS debt markets are opening up again after four consecutive years of less than $50 billion annual new issuance.  Underwriting terms and pricing spreads have also compressed in favor of borrowers.  Together with improving market conditions in most markets even properties with elevated vacancy rates have become financeable again due to the low DSCR hurdle provided by sub 5.0 percent interest rates and 80 percent LTVs.

Declining CMBS delinquency rates have further aided new issuance interest. The lower delinquency rates have CMBS investors enthusiastic about 2013’ new issuance increasing 50 percent over 2012’s $50 billion level to $75 billion.  If you have tenants and can meet a 1.4 DSCR using a 4.5% loan coupon, the capital markets are once again open to refinance your “leased” commercial real estate asset.

CMBS Delinquency Rates January 2011 through January 2012
Courtesy of fellow CRE Tom Fink @ TREPP

Source: Trepp – January 2013 CMBS Delinquency Report

Behind the Statistics & Beyond the Basics:

According to Colliers International’s Q1 2013 North American Office and Industrial Outlook reports, the final tally on 2012 net office and industrial space absorption is one that was not in the cards at mid-2012. By the end of 1H2012, it appeared that tenants and businesses were pulling back from leasing activity with 1H2012 absorption down 6% over the prior six-month period (2H2011).  However, despite the market’s November 2012 election and pre-2013 Fiscal-Cliffanxiety, CY 2012 net office and industrial space absorption turned in its best performance since the 2008-2009 financial crisis.  This continuation of improving commercial real estate fundamentals is critical to the capital markets rediscovered favor with commercial real estate.  The improved office and industrial fundamentals paint the following “perfect storm” investment picture for debt and equity capital investors heading into 2013: i) healthy net leasing activity; ii) limited new supply; and iii) declining vacancy rates.


Commercial real estate is persevering to return to a state of balance.  However, the factors that have influenced recovery over the past 12 months, as well as the markets that have participated in the recovery thus far, are broadening.  No longer is the recovery confined to the CBDs of the “sexy-six”/core MSAs – New York, Boston, Chicago, Los Angeles, San Francisco and Seattle;.  Rather, the recovery is expanding to secondary MSAs.  While a dearth of assets in the core MSAs, as well as a search for yield resulting from Fed monetary policy and Cap rate compression, have primarily been behind this broadening of investment interest, it has been job growth in technology, energy and primary-education concentric MSAs (what KC Conway, CRE coined as the ICEE markets in 2011) that has been the distinguishing factor in defining which secondary markets were participating in this broadening of the capital markets.

In 2013, two other influences will positively impact the broadening of the capital markets expansion to secondary MSAs.  Those two influences are the housing recovery and growth in healthcare.  Both these factors are broad based across the U.S. and will have more of an impact on office, industrial and retail real estate.  Why? First, the housing recovery is one where professional services tied to rising new home construction and existing home sales activity will rebuild in proximity to this increasing housing activity.  Second, our health care delivery model is shifting from one concentrated around expensive urban hospital campuses to less capital-intensive, suburban outpatient facilities in or near retail centers. Third, servicing the unique distribution and warehousing needs of the health care industry is one of the fastest growing new niches in industrial real estate.

United Parcel Service (UPS) has jumped out front as a leader in developing a healthcare distribution network.  With approximately 6.0msf of distribution space dedicated to healthcare distribution in the U.S., Canada and Europe, UPS is adding 800,000 more square feet in 2013 – the largest portion of that in Atlanta.   With an aging U.S. demographic and a rapidly growing healthcare industry, healthcare distribution is a niche to monitor; however, it has unique design (temperature controlled facilities) and regulatory requirements that create barriers to entry to those lacking capital and knowledge of the healthcare industry. These search-for-yield, ICEE, housing, and medical office factors add up to M.O.T.S (More Openness to the Secondary MSAs) for the capital markets in 2013.
The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.