CMBS Lending Recovering Some Momentum; New Issues Solve Risk-Retention Matter

September 19, 2016

  • Commercial mortgage-backed security (CMBS) financing slowed dramatically in the first half of 2016 as volatility roiled the debt markets. In addition, new rules governing CMBS issuance that take effect at the end of this year also created uncertainty in the marketplace. However, the first CMBS offerings that comply with Dodd-Frank risk retention regulations were issued in the past month and received strong interest from bond investors. Now that the first risk-retention offerings have been completed, greater certainty in the mortgage bond market will once again make CMBS a viable financing option for commercial property owners and investors.

  • The new risk-retention rules are part of the Dodd-Frank reforms and go into effect at the end of 2016. Under the regulations, CMBS bond issuers must keep 5 percent of the transaction’s value on their books for a minimum of five years, cmbs-volumeor have a B-piece bond investor purchase it. B-piece investors typically purchase the riskiest bonds in a CMBS offering, although their commitment is usually less than 3 percent of the total dollar value. The higher commitment threshold and longer holding period may require B-piece buyers to seek higher yields, placing upward pressure on borrowers’ costs.

  • CMBS offerings that meet the new risk-retention rule came to market since early August. The deals were well received by mortgage bond investors and compressed spreads to some of the lowest points this year, implying a lower cost to borrowers. Currently, CMBS spreads are 235 basis points to 275 basis points above the 10-year U.S. Treasury swap, down from more than 300 basis points over during the second quarter. Although the recent offerings may yet be subject to further review by federal regulators, the initial response buoys the CMBS market that has seen only $41 billion in bonds issued this year.

  • A Federal Reserve survey of lenders indicates that commercial real estate loan standards tightened in the second quarter. Debt providers are likely seeking to balance risk exposure to commercial real estate and take a more conservative lending approach while the current cycle matures, rather than expressing a bearish outlook on commercial property. Some of the greatest tightening occurred for construction loans, a trend that may potentially prevent some early-stage developments from advancing and ultimately minimize the upward pressure of new supply on vacancy rates.

  • Declining vacancy rates and rising rents provide a rich environment for commercial real estate transactions. U.S. multifamily vacancy hit its lowest level in 10 years at 3.8 percent at midyear, but the rate will rise slightly by the end of 2016 as new supply outpaces demand. Rising space demand and muted construction are maintaining vacancy rates in the industrial, office and retail sectors at post-recession lows that bolster investor confidence and support an active and relatively vibrant debt market.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published weekly by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

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The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

Payroll Sets Moderate Pace in August Likely to Restrain Fed Rate Increase

September 2, 2016

  • The U.S. labor market produced a “Goldilocks” moment in August: Hiring was neither too hot nor too cold. Modest payroll growth last month reaffirms the sound state of the U.S. labor market and raises questions regarding whether the Federal Reserve needs to raise its benchmark interest rate when it meets Sept. 20-21. With scant evidence of any overheating in the economy and minimal inflationary pressures accumulating in prices and wages, the central bank’s intentions to normalize monetary policy will likely be postponed.

  • U.S. employers added 151,000 positions last month behind respectable Monthly-Employmentcontributions from consumer-oriented sectors including healthcare, retail, and leisure and hospitality. The number came in below expectations and lags the average monthly gain over the past year, suggesting the Federal Reserve may have to yield to caution when it meets later this month. August employment is often revised upward in ensuing months, but a rate hike based on today’s more modest reading would be challenging to communicate and potentially sow unintended consequences in global markets. In addition, wage growth of 2.4 percent over the past year generates little upward pressure on inflation and signals the central bank can wait for wage pressure to build before acting.

  • Labor market slack, a factor considered by the Fed in its deliberations, is stable. The unemployment rate and the underemployment rate were unchanged last month at 4.9 percent and 9.7 percent, respectively. While most labor market indicators are positive, other data releases this week provide fresh examples of the choppy pattern of economic growth that has persisted throughout this cycle and influenced Fed decisions. These include a year-over-year drop in auto sales in August and a disappointing reading of a manufacturing sector index that coincided with a loss of 14,000 manufacturing positions last month.

  • Office-using employment sectors stood out in August, adding a combined 41,000 positions. Year to date, growth in professional and business services, and financial services has accounted for most of the 449,000 office-using posts created. The increase may be exerting pressure on existing space configurations and prompting a consideration of bigger layouts to house larger office workforces. After falling to a post-recession low of 14.8 percent in the second quarter, the U.S. office vacancy rate appears on track to fall further into the mid-14 percent range this year.

  • An average 205,000 positions were created over the past 12 months and the U.S. economy is promoting the creation of new households and stoking new housing demand. Many new households are settling in rentals and vacancy in the national apartment sector dipped to 3.8 percent at midyear. Elevated completions in some submarkets will place upward pressure on vacancy rates in some metros, but the U.S. rate will likely remain unchanged at 4.2 percent at year-end as demand aligns with supply growth.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published weekly by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

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The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

Elevated Home Sales Push Pricing, but Falling Homeownership Rate Boosts Rental Demand

August 29, 2016

  • Existing single-family home prices marked moderate gains in July, moving back into alignment with the pre-recession peak. Though home prices ticked up, existing home sales dipped for the first time since November 2015 as limited available inventory weighed on further progression, keeping many households in apartments. Steady job creation over the last six years has supported apartment demand, pushing occupied units to an all-time high in the second quarter. Newly formed households have favored renting rather than homeownership throughout the growth cycle, reflecting lifestyle changes and barriers to homeownership. Although the housing market remains very active, first-time homebuyers and millennials have yet to enter the housing market en masse, and the homeownership rate matched a record-low 62.9 percent in the second quarter while apartment occupancy hit a 10-year peak.
  • Existing single-family for-sale inventory remained near a decade low, reaching 4.4 months in July, while a fifth consecutive month of double-digit gains in sales of new homes compressed inventory to 4.3 months, well-below the six-month mark Housing-Sector-16_8-MMregarded as equilibrium. Shrinking inventory levels among both existing and newly constructed residences are keeping prices elevated, reaching $229,600 and $298,200, respectively, in July. Since the housing crisis, homebuilders have been focused on higher-end home construction, leading to a shortage of listings for typical first-time homebuyers and funneling demand into apartments as millennials and other young professionals create new households.
  • First-time homebuyers represented 32 percent of home sales during July, down from 33 percent in June and remaining well below the long-run average of 40 percent. The inability to save for downpayment requirements, more stringent credit terms, and steadily increasing home prices continue to create hurdles for would-be buyers. These factors, among delays in life changes and scarce inventory, have kept many from transitioning into homeownership, stirring additional demand for rentals and keeping the homeownership rate at historically low levels.
  • The limited for-sale housing options have benefited the nation’s multifamily sector, and in the second quarter, apartment vacancy fell to 3.8 percent, equaling the 10-year low. Rent has risen steadily for the past six years, increasing 5.3 percent from last June while the absorption of 123,000 units was one of the highest levels since 2009.
  • The nation’s baby boomer generation is nearing retirement, and the 65-plus age segment is set to rise by more than 20 million over the next 10 years. As a result, seniors housing development is robust with more than 50,000 independent and assisted living units underway. As this generation moves closer to retirement and desires the services provided by senior communities, some current retirees are taking advantage of rebounded home prices and monetizing their equity to redeploy into smaller, age-restricted housing.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published weekly by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

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The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

Shopping Centers Repurpose for Digital Age; Evolving Landscape Spawns Development Slowdown

August 18, 2016

  • A sizable gain in e-commerce sales last month further illustrates the emergence of Internet-based commerce as a substantial force that is prompting a response from shopping center owners and developers. The continuing migration of sales online and shrinking footprints of many retailers are encouraging efforts to not only backfill vacant spaces but also to identify new traffic drivers and reimagine tenant mixes. Retail property developers also continue to respond, eschewing the large multi-tenant formats of the past in favor of single-tenant and mixed-use concepts. The changes underway in the retail sector will provide opportunities for shopping center owners to redefine their properties by offering a combination of goods, experiences, and services in a convenient format for consumers.
  • Over the last year, through July, retail sales excluding gasoline and automobiles advanced 3.8 percent, a level in line with the long-term average. Key categories of Fewer-Completions-Supporting-Retail-Operationsdiscretionary consumer spending tied to household formation and homeownership outperformed, with receipts at furniture and home furnishings outlets rising 4.3 percent during the last four quarters. Building material and garden supply sales are showing similar strength, posting a 3.5 percent gain as higher housing prices motivate homeowners to renovate. E-commerce outlays surged as well, with non-store sales vaulting 14.1 percent from one year ago.
  • Macy’s announcement that they will close 100 additional stores marks the latest instance of a high-profile full-line retailer trimming its store count. Store closures create near-term vacancies but can also provide opportunities for shopping center owners to refresh a property. The departure of large tenants has enabled some shopping center owners to divide the vacated spaces into smaller floorplates and re-tenant with restaurants, service providers and specialty merchants that draw shoppers. Service providers have emerged as especially significant new occupants of multi-tenant space, with non-traditional users including medical practices and financial planners making up a bigger portion of shopping center tenancies.
  • The shift of more consumer dollars online is encouraging a decline in retail property construction that continues to benefit retail property performance. After exceeding an average 120 million square feet annually from 2000 to 2008, yearly completions have since averaged about 49 million square feet. The completion of predominantly single-tenant formats this year will minimize pressure on the vacancy rate and contribute to a decline in nationwide vacancy to 5.7 percent.
  • Construction of mixed-use developments with apartments over ground-floor retail has been extremely popular in urban areas. A significant portion of the 285,000 new units coming online this year will be in the urban core, although the effects on national apartment vacancy will remain minimal due to robust demand. This year, the national multifamily vacancy rate is on course to end the year at 4.2 percent and support rent growth of more than 4 percent.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published weekly by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

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The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.