From Serguei Chervachidze, Capital Markets Economist at CBRE Econometrics: “What’s the long-term spread between cap rates and Treasurys?” This question, with a few variations, comes from all types of clients—from small investment shops to large hedge funds staffed with many quants.
This is the wrong question to be asking, however, in that it assumes Continue reading Research shows that Apartment Building and CRE cap rate spreads shouldn’t be modeled as constant
A very interesting report on apartment building investment posted on the Freddie Mac website discussing Current Multifamily Values & Cap Rates In Historical Context explores where the market is today and where it is likely to be in five years under a number of different interest rate scenarios. Freddie doesn’t do loans smaller than $5 million (implying a minimum deal size of $6.6-7 million) and many of their borrowers are large institutional investors but the forecasting methods and valuation models they use are applicable to apartment building investing on any scale.
Some takeaways from the report:
Rental growth rates are expected to be Continue reading Freddie Mac sees strong apartment rental growth next five years in valuation report.
1) The availability of attractive financing. Plus, the spread between fixed-rate financing and actual year one cap rates is certainly the widest that it’s been in recent history, perhaps ever. (There’s rumor that there was a bigger spread during the Roman Empire, but that may just be an old wives’ tale.)
From a macro perspective, the spreads between the treasury indexes and the premium on multifamily interest rates will almost certainly widen in the near term, but cap rates should remain stable in Class-C properties. They will probably continue to compress to a certain degree for Class-B assets.
2) Job growth Continue reading Two Key Factors for Apartment Building Investment Growth.
Bonds backed by Fannie Mae and Freddie Mac tied to apartment investments soared to a record as the government-supported mortgage companies made low-cost loans on rental properties amid a continued slide in home values. Fannie Mae, Freddie Mac and Ginnie Mae sold $13.5 billion of securities tied to apartment buildings in the first quarter of 2012, an 81 percent increase from the year-earlier period and up from $5.2 billion issued in all of 2008, according to data compiled by Bloomberg. It’s the highest quarterly issuance since records began in 1993.
The interest rate for a 10-year, fixed multifamily loan Continue reading Fannie, Freddie and Ginnie do $13.5B in apartment investment lending biz during Q1, +81% YoY.
Great podcast on the financing market for CRE and apartment building investment with a look at potential impacts from events around the world.
“In this Global In-Sights podcast, Spencer Levy, Executive Managing Director for CBRE Capital Markets, shares his view on the commercial real estate debt and equity finance markets. What are current key sources of capital, what is the current pricing of CRE debt, and what are expectations going forward? Are there key sectors that are attracting most of the capital flows? What are expectations for interest rates and how are investors underwriting the possibility of an interest rate spike in the next 2 to 3 years? What are some of the key positive trends that we suggest our clients look out for when selecting markets in which to invest?”
A few bullet points: Continue reading Rising rates won’t necessarily lead to higher cap rates on CRE, apartment building investments. CBRE debt & equity podcast.
European debt-crisis issues are lessons for the US. They belong in the political debate. Both political parties are responsible for our growing debt issues. Bush ran up huge deficits. Obama continued them. Each party blames the other. See the whole post here: Back from Paris
Especially pay attention to item #4. that begins: Private holders of Greek debt had several years to get out…
For extra credit from ‘The Only Thing New In History’ department: Yet another sovereign debt crisis If that link no longer works use this one to see the PDF.
The bullet points:
- Having believed the myth that governments don’t default, many banks and investors will take huge losses in Europe’s sovereign debt crisis.
- The historical regularity of government defaults—more than 250 have occurred since 1800*—gives the lie to the notion that holding sovereign debt is “risk-free.”
- The sovereign debt crisis of post–World War I Europe provides highly relevant lessons for today.
*Referencing Rogoff & Reinhart’s work in “This Time Is Different”. See ‘Whodunit’ in the column to the right for this essential book.
Three related research pieces from the guy about whom former Fed Chairman Paul Volcker said had a degree of detail that is “mind-blowing” and admits to feeling sometimes that “he has a bigger staff, and produces more relevant statistics and analyses, than the Federal Reserve.”- The Economist
A Template for Understanding…
Ray Dalio | October 2008 (Updated March 2012): The economy is like a machine. At the most fundamental level it is a relatively simple machine, yet it is not well understood. I wrote this paper to describe how I believe it works. My description is not the same as conventional economists’ descriptions so you should decide for yourself whether or not what I’m saying makes sense. I will start with the simple things and build up, so please bear with me. I believe that you will be able to understand and assess my description if we patiently go through it.
Ray Dalio | February, 2012: The purpose of this paper is to show the compositions of past deleveragings and, through this process, to convey in-depth, how the deleveraging process works.
Ray Dalio | June, 2011: This study looks at how different countries’ shares of the world economy have changed and why these changes have occurred, with a particular emphasis on the period since 1820. As explained in this study, the rises and declines in countries’ shares of the world economy occur as a result of very long-term cycles that are not apparent to observers who look at economic conditions from a close-up perspective.
Housington Investment Management runs about $4B in fixed income institutional money so they pay very close attention to the economy, government as well as fiscal and monetary policy. In fact Dr. Lacy Hunt, co-author of the report, is one of Mauldin’s most highly regarded economists. Here’s the exec sum (see the whole article at http://bit.ly/wM9DIY):
High Debt Leads to Recession
As the U.S. economy enters 2012, the gross government debt to GDP ratio stands near 100% (Chart 1). Nominal GDP in the fourth quarter was an estimated $15.3 trillion, approximately equal to debt outstanding by the federal government. In an exhaustive historical study of high debt level economies around the world, (National Bureau of Economic Research Working Paper No. 15639 of January 2010, Growth in the Time of Debt), Professors Kenneth Rogoff and Carmen Reinhart [Again with those two!] econometrically demonstrated that when a country’s gross government debt rises above 90% of GDP, “the median growth rates fall by one percent, and Continue reading Hoisington Quarterly Review and Outlook “Recession in 2012”.
My brother Tom shared an article from the Cato Institute entitled: “Why Gold-Defined Money Is the Answer to Our Monetary Crack-Up”.
I agree with the writer in theory but as Yogi Berra said: In theory, there is no difference between theory and practice. In practice, there is. A couple points:
With a fixed currency like a gold standard innovation and value creation that grows the economy will be constrained and what growth does occur will cause prices to fall, hurting the producers of goods and limiting real returns to their investors. There has to be some mechanism to grow money supply at the approximate rate of real growth in the economy.
The real problems we’re facing around the world are from excess leverage and at the end of every debt binge the unwinding happens in three ways. Debt creation can be reduced and austerity can be imposed to make room for Continue reading Is a Gold Standard the Answer to Our Monetary Crack-Up?
Vince Farrell of Soleil Securities Group sent me his take on what key credit spreads are indicating about the financial landscape and economic prospects. For a little background, a ‘spread’ is trader talk for the difference between two financial instruments, in this case the interest rates offered different debt instruments. As with most spreads these have a historical ‘normal’ range and their trend away from or back towards normal are used to measure optimism or pessimism in hearts and minds of those who create or invest in the referenced instruments.
Vince finds that while most of the credit spreads he follows are wide by historical norms, they are narrowing and the trends are positive for the credit markets and eventually the economy. Here are his comments: Continue reading Credit Rate Spreads as Indicators