Lights Are Back On, but is Anybody Home?
- Nov 20, 2013
Last fall, bond yields were hitting what is now their 52-week low. Since then, yields have
doubled, and in some cases, tripled depending on their maturity date.
Most of the upward momentum occurred this past summer when indications the Fed would be trimming the bond stimulus program (QE3) began to make the sky fall again. With Janet Yellen, Ben Bernanke’s would-be replacement, indicating she will tow the QE3 line should she be confirmed, there probably won’t be any QE changes until the Fed’s March 2014 meeting where they might consider trimming it to $70 billion a month. Some commercial real estate borrowers who prefer fixed rates to acquire or reposition a property decided to wait to do anything from May to September since their deal became marginal at the leverage point they wished to keep because of the increased cost of capital.
Regardless of the rumblings, the money continues to flow for the entire capital stack. Banks are increasing their competitiveness by looking at secondary markets and competing against life insurance companies with construction and rehabilitation offerings. CMBS originations, although experiencing a choppy year with spreads, are expected to hit $75-80 billion in originations for 2013, a 60 percent increase over 2012. Bridge lenders remain extremely busy and continue to pick up the slack where banks cannot by providing financing from everything to note and auction purchases on properties to traditional acquisitions with low occupancy that require rehab dollars. Private equity firms are no longer overlooking ground-up development scenarios that require recapitalization as long as the speculation is kept to a minimum and pre-leasing is above 70 percent.
On Wednesday, Nov. 20, 2013, the AIA’s Architecture Billings Index number for October will be released. September’s numbers noted the entire country was above 50 (signaling expansion), especially in the Western United States which was at 60.6. This, along with the forecast that payroll expansion will hit the pre-recession peak by mid-2014, has more senior level officials in a better mood including Federal Reserve Bank of New York President, William Dudley, who was recently quoted as being more hopeful about the economy than in the recent past. While multi-family continues to be the darling of the industry, the other members basic food group of real estate (retail, industrial, and office), are also seeing a lot less speculation and more focused development and investment. Constructions starts are expected to increase by 15 percent for 2013. 2012 experienced growth of 12 percent.
Residential housing continues to face some headwinds and the lack of congressional and clear economic policy uncertainty is often to blame. This week, the National Association of Home Builders released their updated index number. It stands at 54 – indicating conditions are good, not poor. Unfortunately, this number has been falling since August where it stood at 58. With mortgage rates rising quietly, affordability can become an issue which is why there is so much caution. It’s only been a month since the debt limit crisis came and went. The country is only 60 days away from another debt limit crisis. Congress and the Fed should come up with some stabilizing policies before then including finalizing the Volcker Rule by the end of 2013. This will help to ensure a clear agenda and playbook that encourages increased private investment across the board.