COMMERCIAL MORTGAGES: REAL ESTATE INVESTORS HOPEFUL FOR 2024
COMMERCIAL MORTGAGES: REAL ESTATE INVESTORS HOPEFUL FOR 2024
With the 10-year Treasury yield seemingly turning the corner, cap rates can stop expanding, which would allow investors to get back into the market.
NEW YORK – With the 10-year Treasury yield seemingly turning the corner, cap rates can stop expanding, which would allow investors to get back into the market.
Much like New York Jets fans at the start of the 2023 season, real estate investors are excited about 2024 as the interest rate switch was flipped downward last month and positive sentiment has blossomed.
The 10-year Treasury ended 2023 approximately 110 bps (1.10%) below its October 2023 peak. Investors now sense the implications of an expanding yield are off the table and can start to get on offense.
Evidence of the change in posture abounds. Spread product from corporate to municipal to CMBS bonds experienced a massive tightening across ratings. According to data tracked by the Federal Reserve Bank of St Louis, Baa spreads are as tight as they have been since January 2018 and are within several bps of the lows of the past 16 years. Likewise, junk bond spreads were at their annual low at the end of December according to the BofA High Yield Index.
2023 was an awful year for investment sales. The latest data available from MSCI Real Assets, which tracks investment sales of commercial real estate, indicated that volume in November 2023 was off by 60% from the prior year across all property types. CBRE estimates that when all is tallied, investment sales will have fallen some 45% during 2023 when compared to the prior year.
The hope for real estate investors is that with the 10-year Treasury yield seemingly turning the corner, cap rates can stop expanding which would allow investors to get back into the market. The issue for many investors is their current portfolios. Unlike the stock market, where portfolios can be assembled and disassembled overnight, real estate sentiment changes much faster than the make up of a portfolio.
So those investors with office properties weighing down their returns, are going to be less aggressive about jumping into new investments until they can liquidate some of those problems. An interesting example of that recently played out in Bethesda, Maryland, where according to market reports, 7500 Old Georgetown Pike was acquired for $29.85 million, about $90 per square foot, by a group out of Florida by the name of In-Rel Properties.
That price compares to $133 million which was what the property was purchased for in 2019, so the trade resulted in a loss of over $100 million. Reportedly, the first mortgage lender had a loan of over $100 million and allowed a short sale which means they took a write off of over $70 million to clear the deal. As the saying goes, “one man’s trash is another man’s treasure.”
According to the John B Levy & Company Mortgage Survey, rates are indeed down. New 5- and 10-year mortgages are priced in the 5.75% to 6.00% range for the most conservative loans but floating rate loans continue to price higher with the SOFR index a full 1.50% above the 10-year Treasury.
Here in Richmond, the market continues to hum along for industrial properties which rung up some of the largest investment sales of 2023. Several apartment projects also traded, but nowhere close to the volume in prior years. The amazing story is the continued strength in the office sector. Unlike the dramatic losses incurred on office building investments in the suburbs of Washington DC, several office properties traded in 2023 at a profit for the seller.
An example is Westerre I and II, which traded in October for $25 million or approximately $153 per square foot. The sellers purchased the two buildings with approximately 163,000 SF for $22 million in 2014. Here’s to a 2024 that lives up to the hype!
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