RICHMOND, Va., Feb. 15, 2022 /PRNewswire-PRWeb/ -- Notwithstanding the recent move in Treasuries, overall returns in commercial real estate continue to be extremely low, according to John B. Levy & Company, Inc. For example, the Giliberto-Levy 2 (G-L 2) – the only high-yield commercial real estate index – notched a total return of 6.61% for the 12 months ending September 30, 2021. Investment-grade CMBS turned in a paltry 0.99% return for the same time period. Looking back a scant four years to 2018, the G-L 2 total return would have been a whopping 10.4%!
Treasury yields have taken off, and the stock market has headed south in a hurry. With respect to Treasuries, there are stark differences between 2021 and the first month of 2022. For example, in 2021, the yield on 10-year Treasuries was above 1.7% only six days. By contrast, just one month into the year, Treasury yields have been below 1.7% only two days. To be sure, no one really knows where Treasury yields are headed, but betting folks are in agreement that last year's low 10-year Treasury yields won't be seen anytime shortly.
With respect to loan losses, the G-L 2 showed fairly little action. Delinquent and defaulted loans measured a modest 1.21%, which was down slightly from 1.30% at the end of the second quarter last year. The average mark to market on loans with known credit events was 63% of par, a significant downward move. Most of the credit events came from two asset classes – lodging and office buildings. Office buildings have been especially sensitive to "Covid paralysis," the inability of managers to execute long-term leases while going through a pandemic. Given the Covid events of the past two years, that comes as no surprise.
To be sure, if there's no real yield in the high-yield index, the G-L 2, then there is dramatically less in the benchmark G-L 1, which measures first mortgage returns for life insurance companies and other institutional lenders. The total return for the G-L 1 for the year ended December 31, 2021, was a scant 1.90%. Interestingly, even though the returns are modest, there seems to be a growing interest in money managers attempting to duplicate the returns normally found in insurance company general accounts.
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SOURCE John B. Levy & Company, Inc.
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