Stability and Liquidity Return

After a volatile first half of the year, debt markets returned to a more normalized origination environment.

December 15, 2016

This sector report is excerpted from the Fourth Quarter 2016 Fixed-Income Outlook.

After an almost record-setting pace of commercial real estate loan originations and sales in 2015, the first three quarters of 2016 saw a significant decrease in new sales activity, and large portfolio sales transactions are down 32 percent through the third quarter year over year. However, many earlier headwinds have dissipated, and the pace with which investors have purchased single-asset properties has declined only 4 percent compared to 2015. A robust pipeline, particularly from national and regional banks, should drive loan originations higher in the fourth quarter and may revive larger sales, but we are anticipating a significant decrease in final volume of sales and originations for this year compared to last. While overall sales are down, the rate of foreign investment in properties has been significantly higher this year at 32 percent of overall sales to date in the U.S., compared to 20 percent in 2015, so we expect the fourth quarter to see its typical year-end increase in property sales and originations but below last year’s nearrecord pace.

National and Regional Banks Are Increasing Their Share of CRE Lending

Demand from securitization markets has historically been a key factor in the supply and pricing of commercial real estate (CRE) loans. However, data show that financial institutions and insurance companies have increased their share of commercial real estate lending at the expense of CMBS and Agency funding channels this year.

National and Regional Banks Are Increasing Their Share of CRE Lending

Source: Morgan Stanley, Guggenheim Investments. Data as of 9.30.2016.

The NCREIF National Property Index (NPI) rose 1.77 percent in the third quarter 2016, down from 2.03 percent last quarter and 3.09 percent in the third quarter 2015. Cap rates nudged lower across property types during the third quarter, with industrial and apartment cap rates falling the most (nearly 35 and 40 basis points, respectively). With the exception of retail, cap rates across property types are at or very near historic lows, with cap rates in major markets continuing to be lower than either secondary or tertiary markets, although U.S. cap rates are relatively attractive compared to global markets. Falling cap rates are consistent with the property appreciation we saw during the quarter.

The fourth quarter is usually a time when lenders are rewarded for their patience if they still have capital to deploy. Many of the life companies have hit their allocations for the year and are slowing down their pace of originations through year end. At the same time, the CMBS market is still recovering. This combination will provide for wider spreads for high-quality permanent loans, and should reward lenders willing to increase loan to value on senior financings between 70–75 percent.

U.S. Cap Rates More Attractive than Non-U.S.

U.S. commercial real estate looks particularly attractive relative to comparable foreign markets. This becomes even more apparent when you look at second-tier U.S. city cap rates relative to other countries.

U.S. Cap Rates More Attractive than Non-U.S.

Source: Morgan Stanley, Guggenheim Investments. Data as of Q2 2016.

—William Bennett, Managing Director; David Cacciapaglia, Managing Director

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. ©2016, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.


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