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HFF Research Update: It Only Takes a Spark

Thursday, April 07, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website or access the HFF Daily Rates App in iTunes.

On this day 190 years ago, a chemist named John Walker (some of you are about to be disappointed) serendipitously discovered the “friction match” when he rubbed a sulfur-tipped stick against his hearth. Prior to the discovery, it was difficult to ensure on-demand fire mechanisms in a small, stable and easily distributable fashion. Not surprisingly, his discovery afforded him a sizable fortune, and, nearly two centuries later, the device has needed little improvement.

Analysis of Market Insight and Economic Performance

Sparks flew in the first two months of 2016, but, fortunately, March proved far more sanguine, and CRE markets didn’t catch fire. Corporate bond yields narrowed, REITs gained 10.1 percent in value and we saw improvement in debt spreads – most notably in the CMBS space.

The table below shows total return for each investment class by hold period; it effects more of the same mantra we have espoused for years:  Real estate is outperforming.

REITs April 2016

Taking a look at today’s rates table, one can see the yield on the 10-year BBB is hovering right above 4 percent. In fact, this is the lowest yield it has offered investors since April 30, 2015. It’s "throwback Thursday" for sure.

When Real Capital Analytics releases 1Q 2016 transaction volume data later this month, it is possible the data will show a 25 percent decline in volumes versus the year prior (preliminary estimates show a 29 percent decline). But it is also possible 2Q could prove more favorable, given sharp improvement in credit spreads and allocations remaining competitively priced prior to exhaustion and what most anticipate will be a raucous election season. The three-month decline in BB-rated corporate bond spreads is the most significant since 2012. Lower issuance of CMBS papers appears to be helping spreads as well.

BB Spreads April 2016

We’ll keep an eye on the markets. In the meantime, take advantage of the ability to use attractive capital to meet near- and medium-term capital needs.

Jack be quick.

About Jimmy Hinton

HFF Jimmy HintonMr. Hinton serves as Managing Director of HFF, responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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