QA& Manus Clancy
SENIOR MANAGING DIREC TOR
Office market is still awaiting boost
The U. S. office market has yet to get a bounce from improving employment numbers, according to a Reis Inc. report.
Although more than 200,000 jobs were added this past
second quarter, the office vacancy rate remained stuck at
16.8 percent, the company reported.
“Office vacancies have fallen by a pathetic 80 basis
points [in the last three years],” said Victor Calanog, vice
president of research and economics for Reis. Vacancies
peaked at 17. 6 percent in late 2010.
According to Reis, some 4. 33 million square feet of office
space came on line this past second quarter, while net absorption was 2.97 million square feet.
Reis did note some positive trends, however. For example,
in this recovery metros with technology- and energy-based
economies have already shown signs of rebounding. But
this past second quarter, among the 10 markets with the
greatest decline in office vacancies, only Seattle could be
considered technology-driven. Reis said this indicates that
the improvement in the vacancy rate is broader-based.
Reis also forecasted that office-market rents would increase in the range of 3 percent to 3. 5 percent.
CMBS delinquencies fall
Delinquency rates of U.S. commercial mortgage-backed
securities (CMBS) fell for the 15th straight month this past
June, and all major property types now have a delinquency
rate below 6 percent, Fitch Ratings Inc. reported.
Delinquencies fell 10 basis points overall to 4.87 percent
from this past May’s 4.97 percent.
The only category to increase was hotel CMBS, which was
5. 3 percent this past June, up from 5. 12 percent the previous month, according to Fitch.
Apartment outlook is strong
A perfect storm of factors could help the rental and multi-family market, ranging from high numbers of young people
living at home to large student debt loads and the increasing costs of mortgages, according Marcus & Millichap.
An estimated 3. 3 million people between the ages of
18 and 34 are still living at home, two-thirds of whom are
more likely to rent, company analysts said during a webcast
this past July. Another 1.6 million are coming of age, meaning that roughly 5 million young adults could be in the position to rent. Company officials reported that the multifamily
sector could also be helped because many young people
are making lifestyle choices that tilt them toward renting,
such as putting off getting married and having children.
Marcus & Millichap estimates that 235,000 apartment
units will be added in 2014, the highest amount in 20 years.
COMPILED BY VICTOR WHITMAN
In the Past Month
BY KURT STEPHAN
The CMbS market’s resurgence marches on.
Commercial mortgage-backed securities (CMBS) have come back into vogue with a vengeance in the past few years, with U.S. originations topping $80 billion in 2013, according
to the CRE Finance Council. This year has continued the CMBS market’s upward surge, leading some analysts to project earlier this year that the 2014 origination volume would reach
$100 billion or greater. To check in on how the market is shaping up this year, we spoke with
Manus Clancy, senior managing director and leader of the applied data, research and pricing
departments at Trepp LLC.
What is the general perception of the CMBS market’s health?
People are very surprised at how quickly the market has rebounded. It’s been an amazing
turnaround. Considering that many properties are being valued close to where they were in
2008, [and that] we are seeing the lowest spreads in the new-issue market since 2008, we
should see a record volume for the past five years this year, or at least close to it. Money is
very easily available for borrowers, [and] rates are very low. The market has generally healed
Earlier this year, some analysts were projecting that the CMBS issuance
volume in 2014 could increase by at least 25 percent over 2013. How likely is
that projection now?
We are expecting volume to be about the same as it was in 2013. Many of the expectations
were that 2014 would come in at $100 billion or more, [but issuances are] the one area of the
market that is lagging expectations just a little bit. Most issuers and investors have lowered
their forecasts between January and July to reflect that lower expectation in 2014.
How high can the CMBS market go in the next few years — will we see
volumes to rival those of 2006 or 2007, when originations reached $230 billion
That would be a stretch. I don’t think we are looking at those levels any time in the next couple
of years. We can expect 10 [percent] to 20 percent issuance growth year over year for the next
couple of years, and if we do see that, it would be a real sign of health. I don’t think anybody
would expect to see $230 [billion] or $240 billion any time soon, and if we did, it would be
concerning. It would be indicative of the market being frothy once again, getting a little bit
ahead of itself.
What commercial property sectors and markets are currently thriving in terms
of CMBS issuances?
The parts of the market that are generally well represented in CMBS are the ones that have
always been well-represented: retail, office, multifamily and, to a lesser extent, industrial
and hotel. As far as broader market trends, the parts of the market that have been very well-received [and] sought after are the trophy properties in the 24-hour cities, places like New
York, Boston, Washington, D.C., San Francisco — those markets have done very well the last
couple of years, and those types of properties remain in high demand.
What is concerning at this point are two parts of the market, not necessarily reflective of issuance, [but] more of general sentiment. [First], shopping malls in general — anything with
exposure to retailers that are either struggling, like a Sears, Kmart or JCPenney — or places
where large shutdowns of businesses have already been announced: Staples, Office Depot,
OfficeMax, those types of places. The other area of weakness is suburban office parks. That
[sector] has not benefited from the rally we’ve seen in the last couple of years.
Some industry observers worry that unsustainable practices — such as loan-
quality decline and underwriting deterioration — reminiscent of the precrash
era are returning to CMBS lending. What is Trepp’s take on this?
There is a lot of concern; many researchers have put out press or research pieces about [these
practices] and the stretching of debt-service coverage ratios and LTVs [loan-to-value ratios].
Certainly the pattern is there. The asset quality isn’t as strong as it was right when we came
out of the recession in 2010-2011. We don’t feel like it’s frothy at this point in regard to valuations and the amount of debt being put on these properties. If we are worried about anything,
it’s the prices being paid for legacy bonds; the fact that investors are really chasing yield at
this point, driving spreads lower and lower for [eight- or 10-year] instruments. That has more
concern for us — the likelihood or possibility of overpayment for assets, more so than the under writing standards at this point.
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