Looking back on the first quarter of 2017, there appear to be very few things that we know with certainty. We do have a new president and there has been – at least in the business sector – a positive “Trump bump” though not as large as had been expected. Going forward, we venture a few ideas:
- Retail – especially the mall variety – has been taking a bruising and rightfully so. If you’re not a “fortress mall”, say a Tyson’s Corner or Lenox Square, hard times continue. Internet retail has had a torrid run, and it’s not over with plenty of room to run. Internet retail sales are just slightly over 8% of total retail sales. To the contrary, grocery-anchored centers are highly sought after with cap rates well below 6% in many locales.
- Despite the rise in interest rates, overall rates – below 4% in certain cases – seem dirt cheap to us. Although 10-year fixed rates remain the benchmark for institutional lenders and the CMBS market, we continue to offer non-recourse fixed-rate loans for 20-30 years and in selective cases, out to 40 years.
- We’re told that for baby boomers 60 is the new 40. On the commercial real estate side, it’s the opposite --- 65% is the new 75%, loan-to-value that is. Dodd-Frank and other regulations are causing banks to seek lower leverage loans. Investors have noticed and are offering mezzanine loans and preferred equity transactions to fill the void at rates as low as 6%. Our brand new Giliberto-Levy High Yield Performance Indexsm will be measuring the details of this exciting new sector.
- CMBS liquidations continue with heavy losses. February losses were more than 43% of the principal amount. In certain securitizations, cumulative losses could reach the AAA level!
As always, we welcome your thoughts.--John B. Levy
