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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

questions

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