Commercial Real Estate prices post double-digit annual gains in May
Momentum picks up in the General Commercial segment
Improvements in market fundamentals underpin growth in commercial property pricing
Capital flows remain healthy
Distress levels continue to dissipate
See link for numbers and details-
CoStar has been tracking the indexes of repeat commercial real estate sales since 1996. Note that the Value Weighted index is driven mostly by core properties while the Equal Weighted index is mostly driven by smaller, non-core property sales.
Tom Barrack over at Colony Capital put up a nice presentation of where he sees the opportunities for real estate investment in the current market. While Colony is geared to serving their large institutional investors, those of us operating on a smaller scale can benefit from Tom’s insights as well.
My Exec Sum of the opportunities he sees that I think will impact smaller investors in North America (and my comments in parentheses):
Commercial and residential real estate are great investments today because equities and debt are mispriced and the economy is regaining its feet. (There will be competition however).
Distressed debt in the US is diminishing but they are continuing to resolve non-performing assets (which can create deals for long term holders as these turned around assets come back to the market).
Single family residential for rent housing is stabilizing and becoming a institutional asset class (which can provide exits for those who have built portfolios of these properties).
Mezzanine debt and what he calls ‘stretched senior debt’ is becoming more available for value add & opportunistic deals because institutional investors such as pension funds need the extra yield (it will be easier to finance turnaround commercial properties at higher LTVs).
The Urban Land Institute/PriceWaterhouseCoopers annual report on Emerging Trends for Real Estate 2014 was released last week and apartment building investors and commercial real estate pros have some good things to look forward to next year. Note that this post refers to the Americas version of the report with separate sections on Canadian and Latin American markets but they also publish Asia-Pacific and European editions as well. This is the 35th edition of the report is it’s based on individual interviews or surveys from more than 1,000 investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants.
Here are the 5 key trends we should all be aware of with my comments:
Survey participants continue to rank private direct real estate investment as having the best investment prospects. Pretty expected from this group but the National Council of Real Estate Investment Fiduciaries (NCREIF) recently released its property performance index for the third quarter of 2013 and on a trailing 12-month basis, the index’s return was 11.0 percent, split about 50/50 between income and appreciation. A pretty nice return compared to fixed income rates and a much safer looking bet than buying equities at their all time highs.
Dependence on cap rate compression to drive value is being replaced by an emphasis on asset management. Especially in the 24 hour gateway markets apartment building cap rates are about as low as they can get (well until you look at Vancouver BC) so property performance has to come from actually making the property perform. You also have the problem of what to do with your proceeds if you do sell, as you would be reinvesting right back into the same cap rate market that you sold in… unless you changed to a higher cap rate sector, suburban strip centers anyone?
Opportunities to develop property are finally appearing in sectors other than multifamily. CBRE Econometrics had a piece out last week showing that large (> 350k sf) warehouse properties are being snapped up as fast as they’re being built. Maybe developers who moved over to doing apartments the last few years will move back to their home sectors and ease off on the new supply of multifamily units.
Value-added investment ranked highest in terms of investment strategy; distressed properties and distressed debt ranked last. We were licking our chops a few years ago waiting for RTC 2.0 fire sales to begin and while we were able take down some bank owned inventory, the anticipated tsunami of defaults on commercial loans never materialized. At this point most everything has been extended and pretended into performing status or sold off and so it’s back to making money the old fashion way: Finding and/or creating value.
Both equity investors and lenders are widening their search for business to include secondary markets and niche property types. This will be a double edged sword for investors who are focused on those secondary and tertiary markets as debt financing will be more available but there will also be more competition from sophisticated outsiders with deep pockets. The key will be to make them your buyers so dig in, find the right properties and tie them up quickly.
In many top US markets the supply of office space has not just been stagnant, it’s actually been shrinking and apartment building investors have been the beneficiaries.
In a CoStar piece out today entitled Didn’t That Used to Be an Office Building? they list a couple big advantages of converting office space to apartments: Office working residents are close to work, and there’s great access to public transportation. How many people who spend hours a day sitting on the freeway would like the option to park the car all week?
If you combine the residential and mixed use portions of the chart below, 56% of the office conversions/demolitions are going to apartments:
The rate on the 10yr fixed (30yr amortization) apartment building loan we track stayed in the 5.0-5.1% range for the second week while the spread to the 10yr Treasury remained in the 240 area, still lower than the 2013 average of 264:
Tom Barrack was on CNBC last week to talk about real estate with the traders. Great TB quote to open the show: “It’s always great to be the slowest guy on Fast Money”. There’s more wisdom in that statement than any of the show’s regulars understood.
A couple bullet points but definitely worth watching the video. The link on the image below goes to the Colony website where they edited the three segments together (commercial free too):
Housing [of all types] is the best opportunity. Today there might be a Fed bubble but there isn’t a housing bubble.
The rise in interest rates while not big and still low historically speaking, will hit entry level housing. 100bp (basis point, where 100bp = 1%) rise in interest rates will cost a borrower an extra $150+/- a month on their mortgage payment for a $200,000 home. That will keep more people renting.
Interesting report from CBRE Econometric Advisors on the revised employment numbers just out from the Bureau of Labor Statistics’ (BLS). The BLS updates their employment numbers every year to reduce the error rate from their regular surveys and the revisions were up:
It is important to understand that the employment data produced by the BLS are based on a survey and therefore are subject to sampling error. As part of its survey methodology, the BLS completes a re-benchmarking of its payroll employment data annually, to account for any job gains or losses that were missed over the course of the past year. The payroll survey consists of a sample of 145,000 businesses and government agencies covering 557,000 worksites throughout the U.S. The BLS uses a birth-death model to account for changes not directly reported in its sample due to business openings and closings.
In order to adjust for missing information that could cause the birth-death model to miss its mark, the BLS annually benches its estimates to unemployment compensation records, to allow for a reconciliation of total payroll employment. Although the largest changes are always seen in the most recent year or two, estimates as far back as five years may be measurably altered, which can have a significant effect on how the labor market is seen to have affected commercial real estate demand. The process is first done at the national level, and then at the state and local levels.
The Urban Land Institute’s April Real Estate Business Barometer reports that apartment building investment sales were strong enough to pull the entire sector up from last month’s slump while CRE prices are at four year highs. Condominium sales are also at a 5-1/2 year high with strongly increasing prices.
CBRE Econometrics is out with a new report showing population growth trends in major US metros has shifted towards urban centers since 2010 but apartment building investors have been keeping pace (or exceeding it) with new construction. Author Gleb Nechayev, Senior Managing Economist lays it out nicely in a series of charts: