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As Treasury yields have taken off, the stock market has gone in the opposite direction, says John B. Levy & Co.

Two Benchmark Indices Show CRE Returns Lagging 

Notwithstanding the recent move in Treasuries, overall returns in commercial real estate continue to be extremely low, according to John B. Levy & Company, Inc. That’s based on the investment management firm’s analysis of its two benchmark indices: the Gilberto-Levy Commercial Mortgage Performance Index (G-L 1) and the more recently introduced Gilberto-Levy High Yield Real Estate Index (G-L 2).  

For example, the G-L 2, reportedly the only high-yield commercial real estate index, notched a total return of 6.61% for the 12 months ending Sept. 30, 2021. Investment-grade CMBS turned in a “paltry” 0.99% return for the same time period, the firm says. By contrast, looking back four years to 2018, the G-L 2 total return would have been a whopping 10.4%. 

“Treasury yields have taken off, and the stock market has headed south in a hurry,” the firm says. “With respect to Treasuries, there are stark differences between 2021 and the first month of 2022. For example, in 2021, the yield on 10-year Treasuries was above 1.7% only six days.  

“By contrast, just one month into the year, Treasury yields have been below 1.7% only two days. To be sure, no one really knows where Treasury yields are headed, but betting folks are in agreement that last year’s low 10-year Treasury yields won’t be seen anytime shortly.” 

With respect to loan losses, the G-L 2 showed fairly little action. Delinquent and defaulted loans measured a modest 1.21%, which was down slightly from 1.30% at the end of the second quarter last year. The average mark to market on loans with known credit events was 63% of par, representing “a significant downward move,” according to John B. Levy.  

Most of the credit events came from two asset classes – lodging and office buildings. Office buildings have been especially sensitive to “COVID paralysis,” i.e. the inability of managers to execute long-term leases while going through a pandemic. “Given the COVID events of the past two years, that comes as no surprise,” the firm says. 

However, if currently there’s no real yield to speak of in the high-yield index, the G-L 2, then there is even less in the benchmark G-L 1, which measures first mortgage returns for life insurance companies and other institutional lenders. The total return for the G-L 1 for the year ended Dec. 31, 2021 was a scant 1.90%.  

Interestingly, the firm says, “even though the returns are modest, there seems to be a growing interest in money managers attempting to duplicate the returns normally found in insurance company general accounts.” 


Inside The Story

John B. Levy & Company

About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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