Tag Archive for: u.s. economy

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The U.S. commercial real estate industry’s ability to get credit and, therefore, fortunes have strong ties to the 4,648 insured banks (according to the FDIC) in the country that provide about 38.6% of CRE loans.

Anything that negatively affects the stability and credit ratings of the banks is an issue for the CRE industry. Despite multiple federal officials and regulators repeatedly saying that the entire banking system is sound, Moody’s recently cut ratings on a number of smaller and regional banks and put some larger ones on notice that they might face potential actions.

Now Fitch Ratings analyst Chris Wolfe warned in a CNBC interview that the current financial state of banks couldn’t be taken for granted. It is possibly that a slight change in conditions for the industry, with an overall rating drop like the one Fitch instituted in June, could force a reconsideration and credit downgrade of some major banks, including JPMorgan and Bank of America, because an individual bank can’t have a credit rating higher than the industry as a whole.

In June, Fitch downgraded banks’ “operating industry” score from AA to AA- “because of pressure on the country’s credit rating, regulatory gaps exposed by the March regional bank failures and uncertainty around interest rates,” as CNBC wrote.

A second downgrade would leave the industry at A+. Currently, JPMorgan and Bank of America, among some other of the largest banks, have an AA- rating from Fitch.

JPMorgan said that it did not have a comment in reply to a GlobeSt.com request. Bank of America also said it wouldn’t comment, but did send a copy of Moody’s May 3, 2023, upgrade of the “long-term debt and deposit ratings, counterparty risk ratings and counterparty risk assessments of Bank of America Corporation” and its rated subsidiaries and the baseline assessment of its principal bank subsidiary, Bank of America, N.A.

However, in today’s quickly changing economic environment, the date of that upgrade is close to four months old. Downgrades would have serious implications for banks and for CRE lending. With a lower rating, banks have higher credit costs and more concerned investors and depositors. That could drive banks to polish up their balance sheets even more, which in turn could mean reductions in CRE lending and selling off of existing loans, which would drive down their value and that of existing loans, undermining valuations going forward.

 

Source: GlobeSt

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Industrial has been on quite a tear over the past few years, as changes in consumer behavior have driven demand for more logistics and fulfillment facilities in key markets.

And according to one industry expert, the sector should stay a favored asset class for experienced investors, despite rising capital costs.

“Post-pandemic consumer behavior has changed and the rate of growth in ecommerce has slowed which has already led to pullbacks by some companies,” says Greg Burns, Managing Director at Stonebriar Commercial Finance, noting Amazon’s recent announcements regarding its industrial portfolio. “Demand for industrial though was driven by other factors as well including a move toward onshoring and the disruption of just in time supply chains.”

With that said, however, Burns said “depending on the what and the where, I would not be surprised to see cap rates widen another 50 to 100 basis points.”

“The cost of debt and equity capital have increased and cap rate hurdles have increased for institutional buyers,” Burns says, adding that he recently saw an increase of 100 basis points in an appraisal for a property in a market where his firm closed a deal six months ago.

Burns will discuss what’s happening in the capital markets in a session at next month’s GlobeSt Industrial conference in Scottsdale, Ariz. He says Stonebriar’s definition of industrial includes not just warehouse and distribution facilities, but manufacturing, life sciences, cold storage and data centers as well, and notes that “each of those sub-categories have their own dynamic and, broadly, all are growing.”

“We prefer properties with multi-modal access, especially those near ports, with most opportunities we’ve seen recently being to the southeast of a line drawn from Baltimore to Phoenix,” Burns says. “We also pay attention to outdoor storage capacity as that has become a greater consideration for tenants. There have been several announcements of new manufacturing sites relating to microchip and electric vehicles which should lead to demand for new logistics properties nearby.”

As the costs of debt capital rise, Burns says Stonebriar’s underwriting will continue to focus on the sponsor, asset and market and “that won’t change.”

“We do few spec development deals and will likely be more granular on understanding the demand/supply side of a respective market,” Burns says.

Ultimately, a recession seems likely and Burns says the changing economic landscape will have “varying impacts” on investors and individual markets alike.

“From our perspective, there will be a premium on a sponsor’s experience and capacity,” Burns says. “I anticipate industrial will remain a favored asset class for investors although those with less experience in the sector could pull back until the economy recovers.”

 

Source: GlobeSt.

 

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Core CPI inflation and headline CPI both decelerated last month, in a trend experts say could portend more disinflation factors in the near term.

Analysts from Marcus & Millichap note in a new analysis that the prices for some commodities also fell in October, including apparel and used motor vehicles, and the fees certain medical services.

“And these may be early signs that less disrupted supply chains are alleviating some of the structural drivers of inflation,” Marcus & Millichap say.

Headline CPI increased 7.7 percent over the 12 months ending in October, the smallest year-over-year increase since January of this year. While the deceleration is notable, Marcus & Millichap experts say the downshift is unlikely to be enough to fend off another hike in the overnight lending rate in December.

“The Federal Open Market Committee noted in its most recent forward guidance that it is looking for a clear trend of inflation normalizing toward the 2 percent target,” Marcus & Millichap say. “Even so, the FOMC has also acknowledged that there is a delay between when monetary policies are put in place and when the economy responds, and last month’s slower price climb, paired with an uptick in unemployment, support a more moderate rate hike. The current expectation is for a 50-basis-point December rise in the fed funds measure, capping the fastest year of increases since the early 1980s.”

But October’s inflation news offers a “mixed outlook” for retail CRE: while rent growth has improved and vacancy has tightened over the last year, prices continue to keep pace at restaurants and grocers. Gas prices also ticked up in October after three months of decreases, and higher energy bills are predicted to constrain consumer spending entering the holiday shopping season.

High housing costs are good news for the multifamily sector, where rents continue to rise at a rate that’s half the typical house payment. Over half of last month’s CPI increase was driven by higher housing costs, Marcus & Millichap says.

“In recognition of these housing needs, multifamily construction activity is set to hit a record magnitude next year,” Marcus & Millichap say. “While the new supply is warranted in the long-run, in the short term it will drag on fundamentals, especially as high inflation and rising interest rates weigh on economic outlooks and prompt more households to stay put in 2023.”

Lenders are also pumping the brakes as the cost of debt continues to increase. CBRE’s Lending Momentum Index fell by 11.1% quarter-over-quarter and 4.7% year-over-year in Q3, while spreads widened on 55%-to-65%-loan-to-value (LTV) fixed-rate permanent loans running from seven to 10 years in length. Marcus & Millichap has noted that pricing is recalibrating across most property types as the expectation gap between buyers and sellers widen and lending criteria have tightened.

“But once interest rates stabilize, however, investors and lenders will be better able to determine valuations and move forward on trades,” the firm says. “In the interim, the dynamic environment fostered by the Fed could lead to unique options for buyers, who may face less competition now than when rates plateau.”

 

Source: GlobeSt.

 

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The residential real estate market has received quite a bit of attention over the last two years, and for good reason.

The housing market has become so tight that inventory is extremely hard to come by in nearly every market, and prices are now higher than ever for homes. The properties that are listed for sale typically get snatched up in record time—and often sell for higher than asking price—which has made it tough for most buyers to compete.

Case in point: A moderately priced home recently went for sale in Raleigh, North Carolina, and it was absolutely inundated by potential buyers searching for affordable properties. That mad dash by buyers was enough to make national headlines, but any buyer who’s looked for property in the last two years was almost certainly not surprised by the overwhelming interest. That’s just part of what buyers face when looking for property in a red-hot housing market.

But the property buying frenzy that has occurred recently has hardly been limited to the residential housing market. Commercial real estate transactions have also exploded—with a surprising surge in transactions occurring over the last year. Throughout 2021, investors big and small snatched up everything from apartment buildings, warehouses, and distribution centers to other types of commercial properties, such as hotels. As of the second quarter of 2021, multifamily property sales were up 26% year over year and nonresidential properties were up 16% compared to the year prior.

There were also increases in sales rates across all commercial property types. The rampant demand for commercial properties also led to $193 billion in commercial real estate transactions occurring in the third quarter of 2021—and a record $809 billion in commercial property sales for all of 2021.

So what exactly drove the surge in commercial real estate transactions throughout 2021—and why? EquityMultiple compiled a list of six important trends in the commercial real estate markets during 2021, covering topics from the rise of individual investors to the impact of the federal reserve’s pandemic policies. Here’s what you should know.

The lower bond prices caused key bond market indices to post their first losses since 2013, and led investors to look for other ways to put their money to work, which included commercial real estate securities, real estate investment trusts, and other commercial property investments. While potentially risky, commercial real estate transactions can be lucrative for investors, with annual yields averaging between 6% and 12%, with potential for significant appreciation depending on market conditions and other factors. That means investing in commercial real estate has the potential for a significantly higher return on investment when compared to the average return on bonds.

These loans were then converted into commercial mortgage securities, which are offered to individual investors, investment firms, and other financial management companies as shares. By doing this, swaths of investors were able to buy into commercial real estate transactions without having to fund the full purchase of the physical properties or land. Apartment buildings, life science labs, and industrial properties—which were expected to yield higher returns than other commercial properties, such as shopping malls or retail centers—were especially sought after. These types of commercial properties yielded more than $193 billion in sales during the third quarter of 2021.

In turn, the demand for distribution centers surged, and vacancy rates at these properties reached historic lows. That led investors to capitalize on the trend by buying distribution centers and then rake in the profits from the high lease prices. Rampant supply chain shortages also made it difficult to develop more of these types of properties, which only added more fuel to the fire. Distribution centers and warehouses were suddenly selling for a premium, and investors were willing to pay the price for these properties, which kept transaction rates high.

By purchasing apartment buildings, commercial property investors are able to capitalize on the opportunity to profit from the increased rent prices that occurred. In 2021, rent increased by an average of 11%—or three times the normal rate—and it has only continued to increase from there. As of February 2022, the average national rent price for one-bedroom units was up 22.6% year over year, and two-bedroom rent was up an average of 20.4%.

As such, it can be tough for small investors to qualify, which has led them to set their sights on other options such as real estate crowdfunding, which opens access to commercial real estate transitions and other private fund structures. Another option includes open-ended funds, known as non-traded real estate investment trusts. Non-traded REITs accounted for about 42% of the alternative investment market in 2021, with about $36.5 billion total in fundraising that year alone. Part of the draw is that, unlike most traditional REITs, investors can buy into non-traded REITs for as little as $2,500—and there’s an opportunity for big returns in exchange. Most non-traded REITs have been paying dividends above 5%, which is competitive—and often beats—other types of fixed-income investments.

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The US commercial real estate market is looking very cheap to foreign investors, who find their currency hedging costs aligning nicely with the direction of interest rates.

Currency hedging costs are driven by interest rate differentials between two currencies. Low US rates translate to lower costs for foreign investors looking to hedge the currency risk of their US investments. Here is why this dynamic is expected to continue.

 “Short-term and medium-term rates drive hedging costs,” Ciccy Yang, director of Global Markets for Hudson Advisors told listeners in CBRE’s weekly podcast. “And on that front, the Fed’s been giving very strong hints that more fiscal stimulus is needed to keep the economic recovery on track.”

If the stimulus is less than what the Fed prefers, Yang thinks it may have a more significant role in spurring the recovery. Its tools include more quantitative easing for an extended period and a further delay on the next Fed hike.

“The Fed currently forecasts that they’re going to be on hold until the end of their forecast horizon at year-end 2023 as per their dot plots,” Yang says. “In other words, they’re already forecasting short term rates will be bound to zero for quite a long time. Now, we already saw significant hedging cost declines from the beginning of this year when US rates fell significantly in the flight to quality and Fed easing on the back of the onset of COVID-19.”

The five-year annual hedging cost for Euro-based investors in the US has fallen 100 basis points this year to 1.2% today, according to Yang. In the same period, it has fallen 50 basis points to 2.6% for South Korean investors.

“There probably isn’t that much more room for these levels to fall further,” Yang says. “But given the likely expectation of accommodative Fed policy, it does feel like the lower currency hedging costs are generally here to stay in the near term.”

So far though, foreign investors are, for the most part, not biting.

In Q3, cross-border investment fell 71% year over year to $3.5 billion, according to Real Capital Analytics. This is still better than the low of $0.5 billion seen in the depths of the Global Financial Crisis.

The drop-off in cross-border investment might be partially the result of the types of properties being sold. Cross-border groups find it easier to purchase larger properties. Sales for assets priced greater than $50 million fell 61% year-over-year in the third quarter, while properties priced $5 million and below fell 39%, according to RCA.

Some foreign CRE investors, however, are stepping up their US  allocations. In the first nine months of the year, Korean investors accounted for 8.6% of all overseas investment in U.S. commercial real estate, up from 3.7% a year earlier, accordingto the Wall Street Journal,  citing Real Capital Analytics numbers.

South Koreans invested $1.56 billion, up from $1.24 billion a year earlier, trailing only Canadian and German investors, the WSJ said. A year ago, South Koreans ranked 10th among foreign investors in U.S. real estate.

 

Source: GlobeSt

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COVID-19 deepens its hold on cities around the country, the question is increasingly becoming when it will peak in each city and for how long?

By now, U.S. cases have risen to top 600,000 despite a recent plateauing of cases in some areas. Even once the worst of it is officially behind us, we may continue to see the virus pop up here and there, menacing populations that may have thought they were safe.

One commercial real estate professional we spoke to, an asset manager at a major real estate investment firm, is conservative and practical in her recovery expectations. She said in a conference call that “if we shed 10 million jobs in March, we have never created more than 200 thousand jobs in a month. Even if we double that, it will take a lot of time to recover.”

Even after that recovery eventually, inexorably occurs, though, what will the world look like? We keep talking about a return to the way things were, but is that even within the realm of possibility? Or will this period of disruption be so destabilizing to our systems that it will completely change our social, economic and political norms?

While recovery may still be a long way off, it is not too early to estimate the impacts of the crisis on the activity within the commercial real estate industry. That’s why propmoda recently conducted an in-depth survey, in which we collected responses from industry professionals across the country and the world, working in fields from development to architecture to brokerage across a diverse range of property types. The resulting deep-dive report, The Commercial Real Estate Industry’s Reaction to the COVID-19 Threat, uncovered responses and sentiment about the affects of the pandemic on the industry.

Many respondents chimed in commenting on a need for a moratorium on commercial mortgages, and others just pointed to the dire need for an effective treatment or vaccine. One respondent, a leader at an office landlord in Turkey, said that “I don’t think the commercial real estate industry will recover to pre-crisis levels since both employers and employees will be accustomed to new business processes which make use of less office time. People will not change their habits.” So what kind of habits will change?

Will remote work become more commonplace now that we have all started growing accustomed to it? By the time this pandemic ends, all of us will have had a crash course in Zoom video conferencing. What about the way we cluster on city streets, take public transit, or shop at the grocery store? In many ways, COVID-19 seems to be shining a light on trends that were already bubbling under the surface. Online shopping for groceries, for instance, was already growing, by as much as 35 million U.S. consumers between 2018 and 2019.

Twenty three percent of our survey respondents said that they would be using remote working arrangements more, after the COVID-19 outbreak. We are not alone in picking out this trend. In another recent study of 317 CFO-type professionals, Gartner found that almost three quarters of finance leaders will be increasing the number of remote workers within their organizations by at least 5%. Not only that, but their survey also found that 4% of respondents would be transitioning fully half their company’s staff members to a permanently remote plan. 17% of respondents said they’d be sending 20% of their workers home. These numbers could be disastrous to the office market.

Beyond just office space use, COVID-19 is opening up entirely new questions that point to the very heart of the real estate industry. How will retail landlords survive when their tenants cannot welcome shoppers into their stores? How will industrial owners keep their warehouses humming with activity when huge numbers of non-essential goods aren’t being sold? How will apartment landlords respond when their residents can’t pay rent, but regulations prevent them from evicting non-paying tenants? According to the NMHC, April rent payments are down only 7% from March, before the worst of the outbreak came to the country, but that’s just one month. What happens next?

Social distancing is something that will likely come to an end, whether it is in two months or a year and a half. Hopefully, we can end it sooner than later, but the memories of the danger present in close human contact will likely stay fresh for a long time. The economy may get its engine running and wheels turning late this year or some time next year. But will it even be the same kind of car?

 

Source: propmoda

While unemployment continued to decline in April, job creation was a mixed bag in South Florida, according to data released by the state on Friday.

“Florida’s economy is in an expansion mode that is in its late phases,” said Sean Snaith, economist for the University of Central Florida in Orlando. “It’s hard to sustain high rates of job growth. Florida is still adding jobs more rapidly than the U.S. economy, but our lead is narrowing.”

Broward County’s jobless rate fell to 3.2 percent compared with 3.7 percent in April 2017, according to the Florida Department of Economic Opportunity. Meanwhile, the county added 12,800 jobs, an increase of 1.5 percent over the year. That was the most jobs added in the tricounty region.

Construction led job growth in Broward, with the addition of 3,400 jobs, followed by 3,100 jobs in professional and business services; 2,100 in other services; 1,000 in trade, transportation and utilities; 800 in manufacturing; 800 in leisure and hospitality; 400 in government; 100 in information; and 100 in education and health services. Broward didn’t lose any jobs in April 2017.

Palm Beach County’s unemployment in April declined to 3.3 percent from 3.8 percent a year ago. The county added 500 jobs, an increase of only 0.1 percent. There were 2,800 new jobs in construction; 1,800 in financial activities; 1,700 in leisure and hospitality; 700 in manufacturing and 600 in government. However, Palm Beach County also lost jobs over the year: 3,600 in education and health services; 1,800 in trade, transportation and utilities; 900 in professional and business services; 500 in information; and 300 in other services.

Miami-Dade County’s jobless rate was 4.2 percent compared with 4.6 percent in April 2017. The county added 12,300 jobs, an increase of 1 percent over the year. The county added 6,200 jobs in manufacturing; 5,800 in construction and mining; 3,800 in education and health services; 1,000 in professional and business services; and 700 in trade, transportation and utilities. Miami-Dade also lost jobs over the year: 2,000 in financial activities; 1,500 in government; 1,000 in other services; 500 in information; and 300 in leisure and hospitality.

Florida’s unemployment rate was 3.9 percent seasonally adjusted, unchanged from March but a decline from 4.3 percent a year ago. The state added 178,400 jobs, an increase of 2.1 percent over April 2017.

 

Source: SunSentinel

As many expected, the Federal Reserve recently decided to raise interest rates to the range of 1.5 percent to 1.75 percent, and the increases are likely to continue in 2018.

In March, the Federal Open Market Committee meeting announced its expectation for “further gradual increases” this year. Interest rates are extremely important in the evaluation and performance of any commercial real estate investment due to their impact on the present value of future cash flows. Higher rates make borrowing more expensive for owners, and tend to raise cap rates and reduce property values. However, higher rates also mean a stronger economy, which tends to be associated with a stronger real estate market.

So how will these increases affect commercial real estate investors? Alex Zylberglait, Marcus & Millichap’s senior managing director of investment, delves into how the increase in interest rates is impacting both foreign and domestic investment in U.S. real estate.

How will the rise in interest rates influence the commercial real estate market?

Zylberglait: The Federal Reserve recently raised interest rates by a quarter of a percentage point and is expected to raise rates twice more this year. As a broker who handles investment sales targeting properties in the range of $1 million to $20 million, which is the most active segment of the CRE market in South Florida, I can say that I haven’t seen much of an impact in the commercial real estate market yet. But having said that, I do anticipate a delayed effect, with rates influencing the market in the next three to six months. What I am beginning to see are prospective buyers locking in rates for long-term financing.

On the other hand, I am seeing more properties hitting the market, as property owners seek to cash out before cap rates go up as a result of rising interest rates. For example, one of my clients who owns an office building in Miami has a mortgage that’s maturing and debt coming due. Due to rising interest rates coupled with a maturing mortgage, my client wants to unload the property now instead of selling in a higher interest rate environment. But rising interest rates is one of many factors positioned to impact the CRE market this year.

How will higher interest rates impact foreign vs. domestic investment?

Zylberglait: The impact of rising interest rates will most likely be less on foreign investment than on domestic investment. The foreigners who use financing pay a much lower interest rate in the U.S. than in their home country.

However, what we’re seeing is foreigners unloading their CRE assets. For the past seven years, foreign investors have steadily moved away from buying pre-construction condos and turned their attention to CRE properties in Miami. As the Fed raises interest rates coupled with the real estate cycle nearing an end, foreigners are now cashing out for different reasons. Based on where we are in the real estate cycle, foreign investors are selling to capitalize on the rapid appreciation that the South Florida market experienced in the last five years. They no longer expect a significant appreciation so many of them have no reason to hold on to their properties.

Can you give an example?

Zylberglait: One of my clients from Argentina, who has been buying commercial properties in South Florida for nearly a decade, is now selling a single-tenant building occupied by Starbucks in one of Miami’s hottest markets, Doral. He recently renegotiated a nice lease deal with Starbucks to maximize sales proceeds in order to invest in value-add opportunities in the region.

Another one of my clients, Metro Capital Partners, which invests capital from Colombia in Miami, is another example of this trend. Metro recently sold an office building in Miami-Dade County’s West Kendall submarket for $7.9 million, after acquiring it in a 2014 distress sale for $3.2 million. For the most part, these investors are selling to either buy more assets in South Florida or pay down debt on other properties. Foreign investors continue to see our region as a safe place to grow and protect their capital even as interest rates continue rise.

What impact will the rate increase have on the South Florida market?

Zylberglait: In this real estate cycle, a significant amount of assets in South Florida were priced aggressively, with 2015 being the peak. As the market stabilizes or levels off, a rise in interest rates will contribute to faster stabilization of prices, resulting in investors preparing for slower growth and appreciation.

However, some of my clients who are more yield driven are looking outside of South Florida to places like Orlando and Tampa. We are starting to see a migration of investors and developers northward. For example, Dezer, a well-known developer in South Florida, recently purchased a shopping mall in Orlando with plans to redevelop it into an entertainment complex.

Another example is Riviera Point Development Group, a South Florida developer that purchased 3.3 acres on 11551 International Drive, a few miles from Seaworld, where he plans to build a dual-branded hotel, La Quinta Inns and Suites, and Tryp by Wyndham. Riviera Point developed five office buildings in South Florida and a Radisson Red Hotel near Miami International Airport in this real estate cycle. When it came time to purchase more land, Riviera Point’s CEO Rodrigo Azpurua chose Orlando because of land values and appreciation, which can mitigate the impact of rising interest rates. But having said that, I may add that land values in Orlando today are not as advantageous as they were a year ago.

How will the CRE market respond as interest rates continue to rise?

Zylberglait: Everyone knew rising interest rates were coming and as a result, we haven’t seen much of a reaction in the market. There’s no panic. However, the value for Class B and C assets is softening and I expect to see a divergence between Class A, B and C assets.

 

Source: Commercial Property Executive