Daily market intelligence on mortgages, equity raising, investment sales, and CMBS.

Thursday, 17 January 2019

Do Leases Insulate Investor Returns from Rising Interest Rates?

Leases with inflation clauses prevent the erosion of cash flow, and ultimately the valuation, of commercial assets. These clauses have helped blunt the impact of rising interest rates, but to varying degrees across time.

By Ryan Severino

While the relationship between interest rates and capitalization rates is complex and relatively well researched, far less has been researched about the relationship between interest rates and total returns.

In this brief examination, we look at the historical relationship between interest rates and total returns. We do not seek to examine the question of causation - we are simply looking to understand whether total returns for commercial real estate provide some insulation against rising interest rates.

In a rising interest rate environment, asset values generally fall as discount rates increase, resulting in a lowering of the net present value and a declining appreciation return. To offset that downward value pressure, property cash flows would have to increase, upping the income return. Of course, as valuations decline, ceteris paribus, income returns will increase, which would theoretically offset the decline in appreciation return.

Interest rates tend to increase during periods of stronger economic growth. At the short end of the curve, central banks like the Federal Reserve increase interest rates to prevent the economy...





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Data Digest

 

CMBS DELINQUENCY VOLUME

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CMBS SPECIAL SERVICING VOLUME

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Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44

 

RCA CPPI

 

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CMBS 2.0 Spreads

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Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41

 

 

 

REITCafe

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    Mixed economic news is weighing on retail markets, pushing REIT performance down in 2015. This week, the National Retail Federation announced that back-to-school spending is expected to be down 9.3% in 2015. This news came on the heels of a report from the Commerce Department stating that retail sales declined 0.3%...
     
  • US REITs Feeling Effects from Turmoil in Greece and China
    International economic forces have taken center stage this week, affecting both US stock markets and REITs. The crash in the Chinese stock market and ongoing concerns about the future of Greece in the eurozone drove markets down during the first half of the week. REITs fared better than the overall market...

  • What Does Increased Construction Mean for Apartment REITs?
    REITs so far this year have raised $17.1 billion of capital through the sale of unsecured notes, bringing the total raised over the past two and a half years to just more than $75 billion. That’s more than they raised during the previous five years. The massive volume shouldn’t be a surprise as it comes while the yield from 10-year Treasury bonds, the benchmark...
shouldn’t be a surprise as it comes while the yield from 10-year Treasury bonds, the benchmark against which most REIT’s price their bonds
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