The State of the Credit Cycle A publication of Winter issue 2015 sponsored by CRE Finance World Winter 2015 7 hat follows below are key findings elaborated upon in Morgan Stanley’s September 26, 2014, research report “The State of the Credit Cycle”. CRE Prices Rise to Pre-Crisis Levels The Commercial Property Price Index (CPPI) has increased 64.9% since its January 2010 trough and now stands only 2.0% below its December 2007 peak. This represents a recovery of 95% of peak-to-trough losses, which is roughly twice the amount the Case-Shiller has recovered, 47%. However, the recovery is inconsistent across markets, with major markets having recovered 120.9% of their peak-to-trough losses, while non-major markets have regained only 75% of theirs. Out of the main property types, apartment prices have recovered the most since the crisis, recouping 141.5% of peak-to-trough losses, while hotel, retail, and industrial have recouped the least (42.1%, 61.9%, and 70.8%, respectively). Exhibit 1 CRE Price Recovery Inconsistent Across Markets Source: Moody’s/RCA, Morgan Stanley Research Prices Diverge Higher From Four Fundamental Factors The CPPI has diverged higher from four CRE fundamental indicators (cap rates, NOI, investment, and loan origination) and the current differential is as large as it has been since 2001. These fundamental factors will need to improve to support the continued rise in prices over the longer term, in our view. Cap rates: Cap rates have been trending around 6.3% since the end of 2011, while the CPPI index grew from 133.34 to 177.65, an increase of 33.2%. Prior to 2011, the last time cap rates were around 6.3% (2008), the CPPI was at 150. NOI Index: PPR’s weighted average NOI index is currently at 96.75. The last time it was around this level (in 2009), the CPPI was roughly 109. CRE Investment: CRE investment peaked at 1.39% of GDP in 2008, which corresponds with a CPPI peak of 182. Investment is now roughly only 0.73%, but the CPPI is almost back to 180. Loan Originations: MBA’s CRE loan origination index is currently at 164, which is about 53% below its peak in 2007. In contrast, the CPPI is only 2.4% below its peak. Market Share Rising as Issuance Increases Commercial mortgage originations have increased significantly since the end of the financial crisis and are now on par with what was observed in 1Q05. Life insurance companies (and the government agencies earlier in the recovery) have been the primary drivers of the rise in commercial mortgage originations since the end of the financial crisis. However, commercial bank lending has recently accelerated and CMBS issuance is increasing. Exhibit 2 CMBS Market Share Increases to 25% in 1H14 Source: Real Capital Analytics, Morgan Stanley Research W Richard Hill Executive Director of Research Morgan Stanley
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