Earlier last year real estate markets received a scare as CMBS spreads widened, particularly in lower rated and more junior tranches. Additionally, one of the most respected U.S. real estate research firms predicted outright price declines for the asset class in 2016.
While credit conditions have tightened, particularly for construction financing, wider scale credit concerns have largely dissipated and CMBS spreads have tightened. Further, price declines for private real estate, in aggregate, did not materialize and private real estate returns are poised to be amongst the best of all asset classes in 2016.
While recent CMBS spreads indicate a return to normalcy, managers continue to report a tighter market with slightly higher financing spreads and more difficulty in obtaining construction financing. Further, credit markets are an important indicator of stress in underlying markets especially for real estate. Recent data from the Fed does indicate banks began tightening credit standards in the fourth quarter of 2015. This is the first extended period of net tightening since the recovery in real estate began five years ago.
We believe this economic cycle is likely to continue for some time and the credit environment will continue to provide a positive backdrop for real estate investors. However, the easy returns have been made as cap rate declines are likely complete and rising interest rates will become a headwind for the asset class. At Commonfund we believe investors should focus on less interest rate sensitive sectors of the asset class, strategies with positive demographic tailwinds and managers with a unique skill or where value creation is the primary driver of return.