World, corporate travails prompt purchase of debt

The continual pounding of the drums of war and a spate of weak economic news have weighed heavily on economic markets.

These forces, however, have had the indirect result of lowering rates for commercial mortgage seekers.

As fewer investments seem safe in the face of a possible war, money has flowed into U.S. Treasuries, pushing down yields and accounting for a 0.30 percent to 0.40 percent drop in rates during the past few weeks.

Currently, fixed rates are between 4.5 percent and 5.5 percent for 5- and 10-year commercial mortgages, according to the Barron's/Levy National Mortgage Survey.

Carrying the torch in the corporate-image world this past month was Royal Ahold N.V., a large, multinational supermarket retailer that owns such behemoths as Giant Food and Bi-Lo in the United States. Royal Ahold disclosed accounting irregularities that sent its stock and bond prices reeling.

Falls Church-based Capital One Financial Corp. also suffered a sharp drop in its stock when its chief financial officer abruptly quit. The Securities and Exchange Commission revealed that it was investigating allegations that the CFO traded stock on knowledge that had not been made public.

These now-routine corporate scandals have many large investors shifting to publicly traded commercial real-estate debt. These are commercial mortgage-backed securities, known by their acronym, CMBS.

Darrell Wheeler of Salomon Smith Barney says that investors will have as much as $9 billion in CMBS to choose from this month, which is a lot of volume by anyone's measure. Although most analysts expect yield spreads to widen because of the volume, the impact on rates should be minimal. The most recent CMBS transaction, a $1 billion offering led by Credit Suisse First Boston, priced well, but had help because more than 30 percent of the collateral was multifamily loans.

Despite a nationwide softness in the multifamily market, investors and lenders still view the property type in a very positive light.

Marcus & Millichap, a national real-estate and research-services firm based in Arizona, recently published research indicating, "vacancy rates will peak in the first half of 2003 and renter demand will pick up…supply will be the wild card as the level of new construction remains too high given the weak job market."

In Richmond, supply of new apartment complexes has continued despite stagnant growth in employment. In the past 12 months, several projects in the far West End have been completed and are being leased.

The Gardens at Twin Hickory and The Madison at Spring Oak are two new complexes that added close to 900 rental units to the luxury market. So far, the two projects have signed over 600 new leases.

By most standards, the absorption has been quite good for these projects, but what about those complexes currently coming out of the ground? Reflections at West Creek and the Lodge at Hunton Park are two far West End complexes under construction that will add close to 600 competing units in the next 12 months. The Estates at Horsepen, which is closer in, will add another 250 plus units to West End supply.

Given the recent announcement by Philip Morris USA to locate its headquarters in the former Reynolds Metals headquarters building, the clear winner of the new crop has to be The Estates at Horsepen. The luxury units will be ready for occupancy this summer, about the time Philip Morris employees start coming into town. The apartments are practically adjacent to the sprawling headquarters campus.

Andrew Little is an investment banker with John B. Levy & Co.