As previously reported by John B. Levy & Company, Inc., more than 60% of the time, a change in Treasury yields is accompanied by a credit spread move in the opposite direction. Unfortunately, Q1-2022 fell into the zone where Treasury yields and credit spreads both moved in the same direction – in this case, up.
RICHMOND, Va., May 16, 2022 /PRNewswire-PRWeb/ -- Private credit: Commercial Real Estate
- Commercial real estate has hit a "double whammy" with increasing interest rates and spreads.
- G-L 1 and G-L 2 private real estate credit index results.
- Ukraine defines a "black swan."
- Industrial capacity constraints are easing as Amazon notes it has too much space.
In the February 7th note, Giliberto-Levy noted, "if volatility is the style, then 2022 should fit perfectly!" Unfortunately, Giliberto was right -- volatility has been on a rampage – far more than expected. For example, in early January, the 10-year Treasury yielded 1.63%, and it only climbed to 1.72% by March 1, some 60 days later. The last 60 days have been anything but gentile. The proprietary Giliberto-Levy Commercial Mortgage Performance Index, G-L 1, posted a rather depressing -4.41% total return for Q1-2022. Giliberto-Levy has noted in the past that more than 60% of the time, a change in Treasury yields is accompanied by a credit spread move in the opposite direction. Unfortunately, Q1-2022 fell into the zone where Treasury yields and credit spreads both moved in the same direction – in this case, up. That occurs only 16% of the time! We think that the "double whammy" of both the Treasury yields and spread increases caused coupon rates on 10-year loans to rise by some 90 basis points from 2021 year-end to the end of Q1-2022. Clearly, this will lead to a dampening of the pace of lending in Q2-2022.
The proprietary G-L 2 High-Yield Index finished the year with a total return of 7.51%. This was a considerable rebound from the previous year when the total return was 5.56% -- a direct effect of the onset and immediate aftermath of the Covid pandemic. These high-yield loans are mostly floating-rate and, in the past, have been priced over LIBOR. Of recent, Giliberto-Levy has noted a shift to SOFR as the ongoing benchmark, a trend expected to continue throughout the year.
Commercial real estate transaction volume in Q1 was almost $171 billion, which, while a first-quarter record, was a drop from Q4-2021. Cautious investors have noted that prices have started to turn down, albeit a scant 0.4% in March. However, this is the first month-over-month decline since June 2020, which was in the depths of the COVID debacle.
Giliberto-Levy can't think of a single investor in January who talked about Ukraine as having a possible negative effect on both inflation and commercial real estate prices. But these days, that subject comes up frequently with really no end game in sight. China's ability to control COVID adds to just seemingly endless concerns about future growth.
But the world is not all gray. Industrial warehouses continue to be anything but dull, notwithstanding Amazon's recent announcement. The Giliberto-Levy lending surveys now show that for low-leverage industrial loans, spreads may even touch 100 basis points or less, a level previously unheard of. Additionally, multifamily continues to be on a tear. To be sure, rates are up. At the beginning of the year, rates from the big GSEs were less than 3.50%, and while rates are up, at the end of April, spreads are lower than they were at year-end!
Giliberto-Levy continues to be surprised by the institutional interest in retail, an area once thought to be substantially dead, but for grocery-anchored strip centers. But that's clearly no longer the case. Big malls are still a "no-no," but many small retail strips are attracting substantial institutional interest on both the equity and debt side. Giliberto was pleasantly surprised to note that one of the recent non-anchored retail centers attracted some 14 bids!
For further information, please contact Julia Grant at [email protected], or 804-500-9026.
Broker-dealer services provided through Pickwick Capital Partners LLC Member FINRA SIPC
Media Contact
Julia P Grant, John B. Levy & Company, Inc., 1 804-500-9026, [email protected]
John Levy, John B. Levy & Company, Inc., 804-500-9025, [email protected]
SOURCE John B. Levy & Company, Inc.
Share this article