Expert: Positive Leverage Signals New Chapter for CRE
Positive leverage has emerged in the retail and hotel sectors.
A recent shift from neutral to positive leverage is a key milestone in the ongoing recovery of the capital markets.
Abby Corbett, global head of investor insights at Cushman & Wakefield, highlighted a positive leverage of 18 basis points that has emerged in the retail sector.
‘Perhaps even more significant than the number itself is the fact that it’s positive,” she said. “We’re also seeing neutral leverage conditions in other sectors as well.”
Corbett’s analysis is based on real-time debt metrics from Cushman & Wakefield’s Equity, Debt and Structured Finance team alongside RCA’s top-tier cap rates. She said the hotel sector is also seeing positive leverage at around 16 bps, and the apartment and industrial sectors have entered a range of neutral to slightly positive leverage conditions.
Leverage is a significant indicator that occurs when the yields, or cap rates, on an asset exceed debt costs. Over the past two years, CRE investors have been dealing with negative leverage conditions as borrowing costs rapidly rose and outpaced adjustments to private market pricing and cap rates, said Corbett.
“Some investors were still willing to acquire assets with negative leverage given their conviction in the asset’s income growth potential, but many others have been deterred,” she said. “These conditions have been a key factor dampening overall activity.”
Multifamily and industrial have been particularly impacted by negative leverage conditions.
But the CRE industry has reached a turning point. Cap rates have expanded across the board, and base rates, like the 10-year Treasury, have stabilized in the high 3% to low 4% range, noted Corbett. In addition, debt spreads have also narrowed as uncertainty subsides and rate cuts begin.
“This is a strong step forward into this next chapter of CRE,” she said.