This post was originally published on the SVN | Graham, Langlois & Legendreblog.
In my first couple of months working here at SVN | Graham, Langlois & Legendre (SVN GLL), my mentors and colleagues introduced me to the many sides of commercial real estate (CRE). Each facet of CRE holds its own individualized characteristics that make different property types unique. I believe that many millennials, like myself, have yet to realize the vast opportunities that CRE investments hold. In the following article I talk about the fears many in my generation have, and offer reasons why CRE investments are appealing and something Millennials should really consider.
Millennials’ Reservations
I’ve observed that the concept of CRE investments carry a pretense of the dreaded idea of “debt” among my generation. Millennials seem to believe that these opportunities are too overwhelming and are better left for the future. Having observed the market crash in 2008, this generation is often hesitant about spending money on investment properties. We find it easier to simply set our money aside in savings. However, investing in commercial real estate is not something that we should be intimidated by at all. Quite the contrary! CRE investments should be something that we look to as a profit tool. It should be viewed as an opportunity to put our money somewhere that can appreciate in value.
Change
Contrary to what we many may think, millennials and CRE investments share several similarities. Chief among these, in my opinion, is the concept of “change.” One of our generation’s trademarks is our tendency to seek out new ways to improve the previously established systems. Change is often something that millennials embrace. It’s also something that occurs often in the world of real estate. Our generation should be looking to real estate precisely for this reason. Millennials should be tapping into this market as a tool to shore up our investment portfolios and to shape our communities where we live.
[bctt tweet=”Millennials embrace change. Change also occurs often in the world of real estate.” username=”svnic”]
Community Development
CRE investments empower investors to not only create profit for themselves, but also to stimulate the growth of their communities. Commercial real estate investment allows for new business ventures to move in, and for those previously established businesses to expand. We can’t afford to continue selling ourselves short by missing out on these opportunities. The processes of buying and selling commercial real estate are in continuous motion. This ebb and flow allows for both development and redevelopment of our communities, which should appeal to millennials.
Get Excited About CRE Investments
Now, commercial properties are not only profitable, they are relevant to our lives. investing in CRE is exciting! And it’s time millennials get excited about the opportunities CRE provides. Thinking of real estate in these senses, we should be on the lookout for opportunities to invest in commercial real estate. The realm of CRE investments is not consigned to older generations. All too often, a world of financial opportunity that is available in commercial real estate is overlooked or deliberately unexplored by millennials. These opportunities come in unexpected forms, so be sure to open up to unexpected possibilities. Embrace what is different and challenging. It may be the investment of our lifetime!
[bctt tweet=”It’s time #millennials get excited about the opportunities #CRE provides” username=”svnic”]
Present economic conditions are teetering on the edge of flat to very slow growth causing rising fears of a sustained slowdown. The catalysts of these issues are reductions in employment and investment in energy production and a general tapering of demand from overseas. The result to the United States as of June 2016 has been three months of below 200,000 hiring (only 38,000 in May), below 1% GDP growth (0.8% annualized in latest first quarter estimates), and flat growth of corporate profits. Not surprisingly, some investors are worried.
Charlotte, NC
Those making the jump to say that slow economic growth equals a real estate downturn, or even the feared “bubble” should stop and take stock of the fundamentals. Occupancy rates for all major categories of commercial real estate, even apartments, are stable and improving nationwide. In fact, a recent Yardi Matrix report even states that the “worst” major metro it tracks is Houston, and its apartment occupancy rate is still 94.7% where energy price pains are the worst. Rents are generally still growing for all property types as well, even apartments. This point was also made clear by the same Yardi Matrix report stated that nationwide rents hit another all-time record high in May of $1,204 per month. If rents are rising and so are occupancies, then there is one simple conclusion; demand is still outpacing supply. That is a buying sign, not a selling sign, all else equal.
Supply Not Matching Increasing Demand
New supply, which has increased in the past few years, especially in the multifamily sector, may have trouble expanding in the future. Lenders appear increasingly stringent in providing development financing and labor and construction costs are not predicted to slow their perpetual increases. In fact, the internal, less discussed measures from the government jobs report show that hourly labor costs rose 3.9% in the first quarter. Thus, it appears that a part of the slowing pace of hiring is a cost constraint; not necessarily a falling demand issue. Developers of real estate have known this pain for years; they repeatedly tell stories of projects delayed and slowed due to labor shortages. For the commercial real estate market, this means that the supply and demand balance is likely to remain in favor of landlords, even if user demand cools moderately.
Those considering investing in real estate should look at these facts; solid fundamentals, low levels of new supply, and low interest rates when analyzing the next acquisition. Yes, it should be noted, that one great benefit of tepid economic indicators is remaining low interest and borrowing costs. The Federal Reserve is far less likely to push interest rate increases in 2016 than earlier thought and borrowers should take advantage of this. Plus, the real return to bonds and stocks is likely to drag lower compared to real estate, especially when considering the global exposure of many publicly traded companies. Real estate can provide a real income yield, supply and demand suggests that it can grow, and best yet, it can grow with inflation when and if it starts back up. Real estate offers income and stability in these types of economic climates; even REITs have outperformed the general stock market in 2016 to prove the point.
Investors Seeking Affordable Stability
Austin, TX
There is one theme that investors should keep mind, that is “affordability.” Rents can only rise as high as incomes (personal or business) can support. Growth patterns show people and firms moving from high-rent “24 hour” cities (New York, San Francisco, Los Angles for example) to lower rent “18 hour” cities (Nashville, Charlotte, Orlando, Phoenix, Austin for example). Thus, while the major markets have been the leaders in the past few years, it’s logical to expect the “secondary” markets to be the relative winners for the next several years. If a property provides great value and utility at a relative “affordable” price point; then it is best positioned to provide stability in all economic environments.
In conclusion, it would be a mistake to equate minor economic jitters with impending doom, as many on television like to do. The United States went through a significant downturn from 2008 through 2012, but frankly hasn’t grown that fast since. Thus, the economy really is not possibly “overheated” as it was last time. Since commercial real estate is undersupplied on a relative basis, it may actually be one of the best investment categories in the near to long term; a totally different starting point than in 2008.
To learn more about the current CRE market and economic conditions, read the SVN Commercial Real Estate Cooperation Report here.
[bctt tweet=”There is one theme that investors should keep mind, that is affordability #CRE” username=”svnic”]
Last week the world woke up to the implausible, the United Kingdom voting to leave the European Union. Immediately global and domestic equity markets have been volatile with rapid downside moves while perceived “safe” assets such as gold and US Treasury bonds soared in price. REIT stocks, perhaps a leading indicator of the market reaction and a flight towards the tangibility of commercial real estate, have fallen less than the market averages in the days since the BREXIT. All of these reactions, and most that will occur in the coming weeks, are simply reactions to the uncertainty; as nothing has really happened yet. Here is what is known so far:
The UK will suffer from the uncertainty in the short term and probably the long term, assuming Parliament moves forward with the voters’ wishes. Local and especially multinational firms are undoubtedly going to curtail plans for investments in the UK and may even scale back workforces – or at a minimum – rethink future hiring decisions. This alone can and probably will put the UK into a recession, the severity of which could be high if the uncertainty persists. The main unknown factor is how the European Union will react; if they seek to be punitive and harsh to serve as a warning to other countries considering defection, then this could be an ugly “divorce”. Since the UK did not adopt the Euro, this “divorce” is somewhat analogous to a couple separating who never joined finances – still chaotic but not as bad as it could be.
The British Pound will remain low and the US Dollar high. The currency moves, mainly a flight to Dollars from Pounds and Euros, should persist for some time, with higher volatility of course. This will harm the UK the most, and the US will see some benefits in terms of lower fuel costs and prices of import goods. Conversely, US exports will be more expensive so trade flows could become more imbalanced. According to the Wall Street Journal, the UK only accounted for less than 5% of US export volume, so the direct effect should be minimal. Nevertheless, the commercial real estate sectors serving trade and manufacturing could see decreased demand in some instances.
Interest rates in the US are likely to remain low. The “flight to safety” has made US Treasury bonds of all maturities very popular and thus yields are likely to stay low for some time. Further, it is far less likely that the Federal Reserve will move rates up or take other tightening measures this year. This has broad reaching benefits for the domestic real estate markets all around.
BREXIT May Benefit the US Commercial Real Estate Industry
While the jury is still out on the final impacts to the US economy and real estate markets, most noted economists believe that BREXIT will have relatively minimal impacts directly on the US macroeconomy. Further, the flood of capital will actually provide some benefits and firms may direct investment dollars and expansion plans to the US and away from the UK and Europe. To the downside, the strong dollar will hurt export trade and possibly tourism, which has been facing headwinds from overseas for several quarters already. The large multinational corporations with international revenue could see weaker revenue and profit forecasts in the coming years without question. Still, overall “Mainstreet USA” is not likely to see immediate direct effects. When watching the moves of the stock indices it is important to remember that those firms derive anywhere from 30% to 70% of their revenue from outside the country on average; thus a stock market “crash” does not necessarily mean a domestic calamity.
Commercial real estate in the US is most likely to benefit based on what seems probable at this time. Investors seeking yield and safety will find that our real estate assets are a relatively safe place to park capital. The tangibility and low volatility of commercial real estate – even in low cap rate markets – stands to attract investment into the US property markets. This likely flood of capital and lower interest rates could actually cause prices to increase in many markets, especially the major “24-hour” hubs that foreign investors historically prefer. While the long term is far less certain – and there is undeniable risk that the BREXIT could serve as catalyst for a global recession – US commercial real estate looks to be an attractive investment even in those scenarios.
When I picked up my kids from preschool, I noticed that just about every pair of snow boots was gone. (That’s right, in Minnesota, we keep snow boots handy well into May!). Summer is upon us. And, soon, you’ll hear people making the usual excuses for taking it easy:
No one does business
All of the clients are on vacation
I can’t make money
And they’re all untrue.
Now, let me be clear. If you want to take it easy this summer and can afford to, go for it. It’s your business and your choice. However, if you want to solidify your year and maximize your chances of going to Partners Circle, it’s time to buckle down. Think it won’t work? Well, let’s work backwards….
December is, by far, the busiest month of the year for sales.
Deals that close in December go under contract in September or October.
Deals that go under contract in September and October usually get listed somewhere between July and September.
Deals that get listed between July and September usually come from client contacts between June and September.
What does this mean? In brief, summer sets up the best month of the year.
Making the Most of the Summer Months
So what do we do about it? First, let’s face the facts. Yes, people are more likely to take vacation in summer. Yes, they’re more likely to kick off early on Friday. And, yes, some even spend the whole summer at a vacation home or cabin. So what?
If your client is someone who works for a living, they probably aren’t as flaky as you think. Call them any time other than Friday afternoon, and understand that they could be gone for a week or two out of the season. The rest of the time, it’s business as usual, especially if you have something good to talk about. Summer’s a great time for lunches at outdoor restaurants, playing golf with clients and the like. And if you have their cell phone, Friday afternoons can be a great time to reach them. If they’re heading to their cabins, odds are that they’re sitting in traffic and have nothing better to do than talk to you. While New York city traffic to the Hamptons is legendary, this happens everywhere – try taking the Golden Gate Bridge on Friday afternoon to leave San Francisco and get to Wine Country or going out I-94 or US 169 into the lake and cabin area in Minnesota north of the Twin Cities.
Clients who have more free time can be a little bit more challenging, but they’re still reachable. Believe it or not, cabins have phones, computers, and Internet connections. Furthermore, if you’re willing to make the drive to meet a couple of clients in their cabins, you might find that they’re completely different people. Wouldn’t you like to meet prospects that are more laid back, more open and more engaged?
In other words… Business gets done in summer. You just have to do it!
[bctt tweet=”In brief, summer sets up the best month of the year. #CRE” username=”svnic”]
As we progress through the start of a new year, I am pleased to share my thoughts on the robust 12 months past and to offer my outlook for the commercial real estate market in 2016. Before I do, I would be remiss if I did not thank the SVN Advisors, staff, and fellow brokers for their contributions to driving our market forward in spite of changing times. I know that I speak for all SVN Advisors and staff when I wish you a prosperous year ahead.
The Year Ahead in the Commercial Real Estate Market
Uncertainty Breeding Opportunity
After several years of increasing domestic economic expansion and an ever-recovering and ever-growing real estate market, 2016 opens with the return of global economic uncertainty as China’s economic growth moderates, energy prices decline significantly, and geopolitical threats such as ISIS, pose a consistent threat to Europe and the rest of the world. While it remains unclear how today’s macroeconomic conditions will impact commercial real estate markets, there are two scenarios. The first is that global market weakness will impact domestic financial markets, the second is that market impacts remain moderate and commercial real estate remains stable and continues to grow due to strengths in core fundamentals. We believe that the second scenario is more probable given the unique opportunities being posed by forces – like demographic shifts – that are proceeding independently of macroeconomic trends.
Manhattan, NY
As for the commercial real estate markets themselves, 2015 was an amazing year. Real Capital Analytics reported a total of $533 billion in sales representing a 23% gain over 2014, and the second highest level of investment volume over time behind the peak $573 billion in activity seen in 2007. Further, the Moody’s/RCA CPPI has given an initial estimate of 12% year over year price appreciation in 2015. These trends are more likely than not to persist throughout 2016 for several reasons. First, global pressures will have two effects: One, keeping interest rates low (despite the best intentions of the Federal Reserve) and keeping foreign money flowing to the United States, a decent amount of which will flow to real estate. Second, fundamentals are strong – in fact, many markets in almost all property type segments experienced rising lease rates and falling occupancies for most of 2015 and are forecast to continue such growth. Third, new supply remains balanced with demand growth and thus oversupply seems unlikely. The lack of increasing new supply given the growth of rental rates amidst falling vacancies can largely be attributed to rising construction costs and relatively tight lending standards for new development.
What happens in the broader United States macro economy is far more difficult to predict. First, the decline in oil and energy prices is absolutely going to cause highly localized and specific harm to those sectors and in turn cause some level of harm to the real estate markets dependent on energy production, such as those in Texas and the Midwest. Historically, oil price declines acted like a tax break or stimulus package for consumers and businesses and the overall economy thus prospered; since the United States has significantly increased its production of oil and energy following the pre-recession oil price spikes, the effect is less certain today. High price markets like those found in the Northeast and California and parts of Florida are likely to benefit the most from energy price declines as it lowers transit and utilities costs and could boost employment via the stimulus effect.
Overall, we expect that the United States economy will grow more slowly in 2016 than 2015 while still remaining positive and thus avoiding recession. Therefore, we do not see any major risks to the commercial real estate markets as long as fundamentals remain relatively strong.
Investment Outlook
Chicago, IL
Commercial real estate investors who made acquisitions during the downturn are now reaping the benefits of taking such risks. Despite, or in fact, because of these significant gains, many investors and market participants are now openly opining on the possibility of a new downturn in the real estate asset cycle. We do not find such arguments to be very compelling for several reasons. First, many of the causal conditions present before the 2008 economic turmoil are not present in 2016 and are not likely to appear in the near-term horizon. The most meaningful indicator of a potential bubble or overpricing of commercial real estate is the spread between cap rates and underlying treasury rates. According to RCA, cap rates averaged 6.5% nationwide during 2015, while the 10-year treasury rate averaged in the low 2% range for most of 2015 and early 2016. This implies a spread of over 4% (or 400 basis points). Today’s spreads are significantly higher than those observed pre-crash where they averaged slightly below 200 basis points and even below 100 basis points for class A assets in top markets according to the commercial real estate economics researchers at the Lakemont Group. In summary, the market is not presenting the same risk/return profile observed before the 2007 peak of pricing. Further, debt availability is far more constrained post crisis with total leverage utilization down significantly (in fact, the percentage of all equity transactions in many markets is staggering) and therefore the risk of default is relatively low for most investors and deals. Thus, we believe pricing in commercial real estate markets does not represent a new bubble or other significant source of risk.
This conclusion is further strengthened by our belief that interest rates will not experience significant upward pressure in 2016. The energy sector declines and overall global pressures will likely start impacting GDP and employment statistics by the end of the first quarter of 2016. The likely result will be the Federal Reserve slowing or even pausing further rate increases in 2016. Debt markets should remain open and active in 2016 as they did in 2015. If debt costs do not rise and fundamentals remain stable or growing (even if at slower rates than in 2015), it is not logical to expect price declines. In fact, we expect modest price appreciation for most markets.
Top Markets for Property Sales in 2015
(Ranked in terms of total dollar volume)
Manhattan – $55.9B
Los Angeles -$27.6B
Chicago – $22.6B
Dallas – $19.5B
Atlanta – $16.9B
Boston – $16.4B
Seattle – $14.9B
San Francisco – $14.3B
San Jose – $12.5B
Phoenix – $12.1B
Source: Real Capital Analytics
The list of top markets for commercial real estate sales in 2015 appears relatively similar to lists for the past 5 years with the new additions of Phoenix and San Jose. These markets attract institutional capital from private equity, REITs, and foreign buyers and have been the most competitive to find deals, especially with attractive yields. Overall, given the increasing level of global macroeconomic uncertainty, we expect these and related top tier markets to gather an increasing share of commercial real estate investment activity in 2016 as money moves to areas of perceived lowest risk.
Top Growth Markets for Property Sales in 2015
(Ranked in terms of YOY percentage increase in sales volume)
DC/Virginia Burbs – 121%
Baltimore – 71%
Orange County – 70%
Northern New Jersey – 69%
Seattle – 68%
Orlando – 68%
Portland – 61%
Central California – 60%
Inland Empire – 58%
Phoenix – 54%
Source: Real Capital Analytics
The above list of markets may present some of the best opportunities for growth and price appreciation given their relative strength. Capital is starting to rotate to these markets and further price increases may potentially follow. There will likely be expansion in cap rate spreads between primary and secondary markets in 2016, especially if foreign capital flows increase as predicted and those funds seek assets predominantly in only the largest markets. Thus, yield-seeking investors will likely find the best opportunities in the non-top tier markets (such as most of those on the list above).
Miami, FL
Beyond market, property sector is equally important in terms of forecasting investment performance. According to RCA, the apartment sector has been the top performer, up 38% from the peak (defined as Q4 ’07), followed by office, up 18% from the peak. Retail and industrial have lagged at -1% from peak and up 3% from peak respectively but performed well in recent years. We find it impractical to give overall guidance for property sectors on a nationwide basis and encourage investors to work with Advisors who are knowledgeable about each sector in their respective market as finding the best performer can be challenging. Industrial properties offer a prime example of such quandaries – industrial real estate in energy markets should face decreased space demand as that sector contracts in 2016. By contrast, industrial distribution facilities in areas of high population growth (like Florida) may over-perform as retailers shift distribution from stores to warehouses as online sales continue to dominate.
Trends to Watch
Perhaps the most discussed trend in commercial real estate in recent years has been the Millennials, the age cohort who are changing work and living arrangements across the nation. A relatively less covered demographic trend of greater size and perhaps importance is the aging population. According to data from the U.S. Census Bureau and analyses by the Lakemont Group, the overall population in the United States is forecast to grow by 11.55% in the next 15 years while the population above the age of 75 is forecast to grow 69.21%. In fact, those over 75 years old will represent almost 10% of the population by 2030 (those above 65 will be over 20% as well). While many real estate market participants correctly use these statistics to justify the need for more senior housing, there are actually many other real estate opportunities to service this growing segment of the population. Market rate apartments with features and locations this demographic wants, can use, and can afford is one such example. Properties to house medical services and activity retail is another. We encourage investors to think long-term when making acquisition, disposition, and asset management decisions. This is one long-term trend that could shape demand for many property types for decades into the future.
Concluding Thoughts
2016 has started with higher levels of volatility in United States equity markets as a result of justifiably significant fears of global economic pressures causing falling demand domestically. While some investors are taking a fearful stance, we see a different outcome. It is probable that global uncertainty will serve to keep interest rates low and allow for growth of fundamentals in the commercial real estate markets and in the broader domestic economy. Furthermore, even in the event of a domestic economic slowdown, the global uncertainty could lead to lower interest rates and even greater inflows of foreign capital, supporting the domestic commercial real estate market (the current risk / reward proposition of U.S. investment is unbeatable).
Los Angeles, CA
If such occurs, it is likely for 2016 to be another strong year for commercial real estate transaction volume, net operating income growth, and even price appreciation; however, expect all to grow at a slower rate in 2016 than in 2015. Investors and property owners should be aware that today’s commercial real estate economy has little in common with previous downturns. As such, we believe that the risk and return profile of commercial real estate is still attractive in 2016 and is likely to remain so for at least the near-term horizon.
Linda Emery, Senior Investment Advisor Sperry Van Ness Commercial Advisory Group
1. What is your geographic market and product specialty?
My geographic market is the Florida Sun Coast, specifically Sarasota and Manatee Counties, on Florida’s west coast. I specialize in sales and leasing of office and retail properties with an emphasis on medical leasing and sales.
2. What’s your latest best practice tip that you can share?
Feel and show empathy – I’ve always listened to my clients and strived to understand their requirements, concerns and overall strategy. Over the past few years, this has become increasingly important. Transactions for businesses, small and large, are more complicated and require more intense due diligence and vetting. This is the most important service I can provide my clients.
3. What’s been the biggest change over on how you run your business in the past decade?
I’ve found that teaming with colleagues on property listings has been instrumental in the growth of my business. As in any business, volume is essential for success and, even more so when your core business is office and retail leasing. By teaming with experienced colleagues, I enhance the services I provide my clients by tapping into the valuable knowledge of my colleagues and expanding our marketing network. This increases the volume of listings that each of us can manage, our inventory is substantially increased, and this, in turn, provides greater income opportunities for me, my colleagues and our franchise. A win-win no matter how you look at it.
4. What business book do you like to recommend to your colleagues?
Brokers Who Dominate – Our Managing Director gave each of us a copy of this book and assigned us chapters to present “book reports” on at our Monday morning sales meetings. The tips and techniques shared by top brokers throughout the country made us all review our marketing and business plans.
5. What’s a fun fact that not everyone knows about you?
I love bay and inland fishing on the beautiful Gulf Coast of Florida and regularly outfish my husband and our fishing buddies.
*All Sperry Van Ness® offices are independently owned and operated.
Every Friday here on the Sperry Van Ness® blog, we’ll be spotlighting one of our commercial real estate advisors who is game to answer our Five for Friday questions.
1. What is your geographic market and product specialty?
I am based in Portland, Oregon and focus on retail investment sales in Oregon and Southwest Washington.
2. What’s your latest best practice tip that you can share?
Although it is common sense, the best practice that has been fruitful for me in the past year is re-engaging with past clients. I have been reaching out to clients I have represented in buying or selling property in the past and asking what I should be working on for them. This practice has led to several new listings as well as uncovering quite a few buyer needs.
3. What’s been the biggest change over on how you run your business in the past decade?
I don’t quite have a decade in the business (only 8 ½ years) but the biggest change has been building a strong team in the office. When I started my career in 2004, I took the one-man-team approach. Now, sellers want to hire a team of agents rather than one individual.
4. What business book do you like to recommend to your colleagues?
A book I just read has helped me re-focus on my goals in business and life: Train Your Brain for Success by Roger Seip
5. What’s a fun fact that not everyone knows about you?
In my free time (not that I have much with three daughters – ages 7, 5 and 1) I am an avid woodworker. Some of the projects I have completed are a sleigh bed, bedside table, dresser, buffet table, hope chest, bookcase, picture frames as well as several jewelry boxes.
*All Sperry Van Ness® offices are independently owned and operated.
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I’ve observed that the concept of CRE investments carry a pretense of the dreaded idea of “debt” among my generation. Millennials seem to believe that these opportunities are too overwhelming and are better left for the future. Having observed the market crash in 2008, this generation is often hesitant about spending money on investment properties. We find it easier to simply set our money aside in savings. However, investing in commercial real estate is not something that we should be intimidated by at all. Quite the contrary! CRE investments should be something that we look to as a profit tool. It should be viewed as an opportunity to put our money somewhere that can appreciate in value.
