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HFF Research Update for August 5, 2015: Symbiosis

Wednesday, August 05, 2015

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.

Assuredly you are acquainted with the maxim: Transactions volumes are more highly correlated with the availability of capital than with its cost. Shall we reexamine the concept? Grand. The Mortgage Bankers Association (MBA) has released 2Q results of their quarterly survey of originations. The results are favorable, if not surprising.

Analysis of Market Insights and Economic Performance

Transaction volumes in the first six months of 2015 expanded 36 percent over the same time period in the prior year. As we predicted last week, debt originations expanded by a very similar 37 percent ad interim. The graph below manifests the correlation between debt originations and transaction volumes since 2001 is 0.96 - an extremely positive association. 

CRE Symbiosis 1


Equally interesting and promising is the unilateral expansion of origination volumes across the lender spectrum.  CRE Symbiosis 2I acknowledge the below dollar volumes do not equate to the aggregate sum, because they don’t represent every component of the lender space. 

But, pay attention to the macro message. That is, the largest originators are experiencing growth in the 25-35 percent range. As we are well aware, GSE has exited the starting gate with immediacy. Insurance companies that lag in terms of dollars originated by, are very much in line with growth above their record year reported in 2014.

Below is an additional bit of intelligence relating to CRE capital markets and it has to do with top-tier asset valuations. This graph demonstrates the delta between capitalization rates on “top quartile” trades, defined by capitalization rates, versus those of the overall average. Approaching 100 basis points, this spread has consistently risen for years as investors seek “best in class” assets. Clearly, the most thinly-priced assets are attracting bids that are creating outsized capital appreciation. And this concept is borne out by NCREIF’s 2Q return data.

CRE Symbiosis 3

As you can see below, Capital Appreciation continues to move ahead of Income Return in the composition of YoY Total Return, per NCREIF. This is something our team at HFF will be watching closely. There is a precedent of adverse volatility following periods of outsized capital appreciation. Obviously, there are exogenous factors that have contributed to this history, but we are watching it nonetheless. Notice also the continued compression of Income Returns.

CRE Symbiosis 4


About Jimmy Hinton

Mr. Hinton serves as Managing Director of HFF, responsible for the firm’s research efforts. Mr. Hinton works with the HFF Jimmy Hintonexecutive 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.

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