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 or access the HFF Daily Rates App in iTunes.
Real Capital Analytics has released its August edition of U.S. Capital Trends, which includes preliminary volume and pricing data for all commercial real estate trades at or above $2.5 million. For the first eight months of 2016, total transaction volume declined 15 percent, with single-asset transactions down only four percent – implying a much larger decrease for entity and portfolio trades (-38 percent).
As the report suggests, “single asset sales are important as they represent the bedrock of the market. The investment decisions made for these deals [JMH edit: as well as the valuations of each asset] are completed one building at a time and driven by the strengths of that particular asset and investor confidence in the market.” Viewing those transactions gives me a little more confidence in the velocity of transactions across our industry, especially as larger-scale transactions are increasing both in terms of closings (such as Anbang’s Strategic Hotels acquisition) and new announcements (including GIC’s acquisition of a stake in Yes! Communities and Blackstone’s purchase of Alecta’s U.S. assets).
Liquidity is certainly available, even if investor and lender interest has become more discerning.
In the lending space, the CMBS market is increasing its appetite for originations, but, in the first six months of the year, it hemorrhaged market share. As the below graph suggests, CMBS originations in the first half of 2016 accounted for less than 10 percent of the market – the lowest measure since 2009. I have often stated that “less is more” in the CMBS market, given buy-side exhaustion in the securitization space contributed to (though was not solely responsible for) the widening of credit spreads last year. The dearth of paper available for tranche buyers is therefore contributing to the increase in demand we are currently seeing. Moreover, every other lender type either maintained or grew their market share in the vacuum, reflecting a market with diverse participation and available liquidity, certain property types, geographies or structures notwithstanding.
Meanwhile, corporate and sovereign debt markets continue to respond to the FOMC’s decision to hold their Target Fed Funds Rate flat last week. According to the Corporation for Interest Rate Management, the three members of the FOMC dissenting from the decision represented a record number of opposite votes. For a committee that values consensus, there is none. Sometimes it is important to consider current interest rates in a longer time continuum. One year ago, HFF Research Analyst Morgan Allen and I penned a note to the platform discussing some unfavorable corporate profitability in China and how it had driven the yield on the 10-year UST to a one-month low and had fallen 40 bps over the prior 12 months. The yield on that day was 2.05 percent – approximately 50 bps higher than it is today. In the wake of the FOMC’s announcement last week, the yield is now 1.58 percent.
Also included in our note was the following passage: “Janet Yellen has made it clear that the FOMC aims to raise rates this year, suggesting reduced unemployment will push wages higher, leading inflation back toward the two percent that the Fed has targeted.”
We know how that played out.
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.