HFF Research Update for December 1, 2016: Pyrrhic Victories

Thursday, December 1, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website.

In 280 B.C., King Pyrrhus of Epirus, a Balkan state in what is now western Greece, sought war with his Roman neighbors. A second cousin to Alexander the Great, Pyrrhus’ skill in battle was genetic, though his luck was improved through the use of elephants, a disciplined and ruthless cavalry and an infantry of phalanxes. King Pyrrhus won many battles against the Romans, who, in that era, were formidable adversaries, but ultimately succumbed to the Romans’ significant depth.

In his biography of Pyrrhus, the Greek writer Plutarch aptly explained the king’s predicament:

“The armies separated; and, it is said, Pyrrhus replied that another such victory would utterly undo him. For he had lost a great part of the forces he brought with him, and almost all his particular friends and principal commanders; there were no others there to make recruits. On the other hand, as from a fountain continually flowing out of the city, the Roman camp was quickly and plentifully filled up with fresh men, not at all abating in courage for the loss they sustained, but even from their very anger gaining new force and resolution to go on with the war.”

There are times when our small victories can undermine the broader strength of our convictions and our investments. As I write this narrative, both the 10-year UST and SWAP are each up seven basis points from the intra-day break, yielding 2.45 percent and 2.28 percent, respectively. Both securities are trading at effective yields not seen in nearly 18 months. As a result, capitalization rate spreads to the risk-free rate have compressed by approximately 85 basis points since the end of the third quarter. Depending on the benchmark, current cap rate spreads are very close to long-term averages, as the graph below suggests. 

Source:  Real Capital Analytics (RCA), J.P.Morgan (JPM), National Council of Real Estate Investment Fiduciaries (NCREIF)

On this, we will maintain a very watchful eye. Ad interim, as consumer sentiment significantly rebounds, corporate valuations continue rising and expectations of economic growth abound, I am hopeful short-term interest rate spikes representing optimism for economic growth do not inspire “Pyrrhic victories” for investors.          

About Jimmy Hinton

Jimmy Hinton serves as Managing Director of HFF, responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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