Real Estate Capital Institute Predicts More Gradual Returns in Debt and Equity Markets

Jean Darrow Peck

Chicago, IL -- Weaker job growth and lackluster retail sales reports create divergent opinions among bond investors.  Many believe the Fed is less likely to push through rate increases, resulting in an inverted swap-to-treasury curve. 

Mortgage spreads widened in recent weeks as CMBS buyers flock to higher quality offerings, forcing more marginal pools to sell at wider discounts.

For instance, the highest-credit rated portions of current securitized mortgage pools are more than 30 basis point wider as compared to earlier in the year.  And increases of at least ten basis points are commonplace versus

earlier in the fall.  However, highest quality assets still attract pricing inside of the new benchmark of 4% for 10 year funds.

During October rates trended upward, with a spike at the end of the moth. The 5-year T-Note rate ranged from 1.25%-1.53%; the 10-year rate moved about

20 basis points, settling at a high of 2.17%.  Short-term rates remained mostly unchanged.

The trend continues for higher prices across the realty investment spectrum as a long-term phenomenon, so select investors refocus on using equity returns (e.g., equity multiples) as key benchmarks, instead of a heavier

reliance on discounted cash flow modeling.  

Such investors often believe that cash flow growth will be more lackluster than previously projected,

expecting flatter annual returns.  That said, buyers often absorb lower returns based upon relatively low mortgage rates.  The correlation between higher mortgage rates and capitalization rates has about 100 basis points of capitalization rate "shimmy." 

The Real Estate Capital Institute's Jeanne Darrow Peck suggests, "Glamorous

profits and stellar returns in both the debt and equity markets are today

more distant than any time since the Great Recession.  Expect more gradual

returns rather than any 'quick flip' plays, as investors on all sides of the

table use better market information than ever before."

. For a complete copy of the company’s news release, please contact:

Jeanne Peck, Executive Director

director@reci.com

www.reci.com