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CRE Finance World, Autumn 2013

CRE prices are recovering from their recessionary lows. Based on sales activity data from CoStar Group, overall prices are still off by about one-third from peak levels, but they are 5% above their trough. This varies by property type, with office still searching for a bottom and multifamily about 33% higher than its year-end 2009 low (see Chart 11). Chart 11 U.S. Property Type Indices Source: CoStar Group With strong competition in core primary markets, capital has moved to the secondary markets for yield and investment opportunities. Following capital flows, CMBS liquidation activity in secondary and tertiary markets picked up in the second quarter. This investment activity should continue to benefit CMBS collateral, which is more dominant in the non-primary markets. Continuing job growth should sustain the real estate recovery. And unless the economy strengthens significantly, interest rates might not rise much further in the near term. As a result, CRE should continue to benefit from rates that remain low by historical standards. For Future Loan Maturities, Interest Rates Might Not Be As Forgiving Through the first half of 2013, maturity loan payoffs have been strong at 87.65%. We expect this positive trend to continue into 2014, though the recent rise in interest rates could complicate the refinancing of marginally performing loans. However, looking CRE Finance World Autumn 2013 36 beyond 2014, as the next major wave of maturities comes due in 2015 and continues through 2017 (77% of remaining maturities, $295 billion), the prospects might not be as bright (see Chart 12). As these vintages were characterized by highly leveraged loans and underwritten close to or at peak rent levels, market dynamics might not be as forgiving. By 2015, we expect that most likely there will be less liquidity because of the drawdown of the Federal Reserve’s quantitative easing. Unfavorable loan characteristics — coupled with less liquidity and expected higher interest rates (which typically cause a compression in capitalization rates) — could outweigh any value enhancement from improving property cash flows, thereby limiting refinancing prospects. Chart 12 U.S. CMBS Fixed- and Floating-Rate Final Maturities as of July 1, 2013 Source: Standard & Poor’s CANADA Strong Property Markets and Collateral Performance Canada, which has been hampered by sluggish global growth and reduced demand for resource production, has nonetheless experienced strong property fundamentals and collateral performance. Both office and industrial sector fundamentals are among the strongest globally, and these sectors are enjoying relatively low vacancy rates. Multifamily has remained strong, reflecting both favorable demographics and investment demand, while retail has posted strong sales per square foot levels that have attracted foreign retailers. CMBS Global Recovery Continues to Be Slow and Uneven


CRE Finance World, Autumn 2013
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