Wednesday, November 7, 2018

Retail sales continue growth as availability declines across all major segments

Retail and food sales posted a 6.1% year-over-year gain in Q3.

The power and the lifestyle & mall segments rebounded with positive net absorption in Q3 after posting negative absorption in Q2. Increased availability is expected for the lifestyle & mall segment in Q4 due to Sears’ recent Chapter 11 filing.

Consumer sentiment remained historically high despite a small decline from previous quarters.
Availability rates declined across all retail segments, reflecting both buoyant consumer sales and positive net absorption.

Net asking rent increased slightly in Q3 to a 4.3% year-over-year gain.

Consumer spending is expected to post healthy growth for the holiday season, driven by low unemployment and rising incomes from tax cuts.

Source: "Retail sales continue growth as availability declines across all major segments". CBRE. Q3 2018 U.S. Retail Figures. Web Nov 7, 2018.

Commercial Lending: A Second Wind?

Lending volume, as measured by the CBRE Lending Momentum Index, closed in September well above June’s level. Compared with a year ago, the index is up by 13.1%.
Despite the trend of higher interest rates and lower loan refinancings, demand for CRE debt remained strong, supported by an increase in sales transactions in Q3.

The Fed’s additional short-term interest rate hike in September to a target range of 2.0% to 2.25%, along with investors’ concerns over rising inflation and deficits, caused an expansion of the yield curve. Another short-term rate hike by the Fed is likely in December. 

The benchmark 10-year U.S. Treasury settled above 3.2% in early October, approximately 40 basis points (bps) above its close at the end of June. Despite this, credit spreads on seven-to 10-year fixed-rate commercial and multifamily loans held steady. 

After a favorable start to 2018, CMBS issuance slowed by midyear. As of mid-October, year-to-date issuance totaled $63 billion, down from $68.2 billion for the same period in 2017. 

The agency multifamily sector remains stellar. Year-to-date through September, combined Fannie Mae and Freddie Mac multifamily loan purchase volume totaled $90.7 billion, just shy of the record-setting pace of $91.6 billion for the same period in 2017. 

CBRE’s broad loan underwriting measures were slightly more aggressive in Q3. Overall debt service coverage ratios fell slightly, while LTV ratios inched higher. Debt yields and underwritten cap rates fell. In addition, the percentage of loans carrying either partial or full interest-only terms increased to 66.2% from 61.0% in Q2.

Source: "Commercial Lending: A Second Wind?" CBRE. Q3 2018 U.S. Lending Figures. Web Nov 7, 2018.

International buyers boost overall U.S. investment volume

Commercial real estate investment volume rose 17.4% year-over-year to $152.7 billion in Q3. Total year-to-date investment was $394.2 billion, a sizable increase of 10.6% from the first three quarters of 2017. 

Excluding entity-level transactions, which is a better way to gauge the velocity of transactions, year-to-date investment volume was still up by 5.5% from last year to $351.6 billion and Q3 volume was up by 6.8% year-over-year to $122.8 billion.

Greater New York, Greater Los Angeles and the San Francisco Bay Area attracted the most investment in Q3, accounting for 24.5% of all acquisitions. The top-15 markets accounted for nearly 61.4% of total Q3 investment volume.

Industrial, hotel and multifamily cap rates decreased modestly year-over-year in Q3, while office and retail cap rates were essentially unchanged. Industrial cap rates remained lower than office for the fourth consecutive quarter, a new record. 

Pricing for all property types except retail is at an all-time high, with mild deceleration in recent months. Increases in multifamily and office pricing continue to lead the national index, while industrial continues to have decelerating growth. 

Overall, commercial mortgage production year-to-date is slightly softer than in 2017, with combined CMBS and GSE lending down by 3%. CBRE’s Lender Momentum Index is up 13.1% year-over-year. 

Source: "International buyers boost overall U.S. investment volume". CBRE. Q3 2018 U.S. Capital Markets Figures. Web Nov 7, 2018.

Thursday, November 1, 2018

Why DFW was named top real estate market to watch in 2019

With a relatively low cost of living and population growth projections that outstrip other U.S. cities by two times, Dallas-Fort Worth has been named the top real estate market to watch in 2019.

The Emerging Trends in Real Estate for 2019 report from PricewaterhouseCoopers and the Urban Land Institute ranked the Metroplex as the number one market for overall real estate prospects in 2019 out of 78 other cities.

Austin and San Antonio also made it into the top 20 for overall real estate prospects in the annual forecast report, which is compiled from thousands of interviews with real estate experts across a spectrum of industries.

Mitch Roschelle, a partner at PwC, said the economic data points analyzed for the report suggest the strength of the economy and the discipline being practiced in the real estate market.

“If there is a downturn ahead of us, it won’t be real estate that caused it,” he said. “Right now there's way more discipline in all activities in real estate than there has been in any other time in the modern era. We haven’t gotten ahead of ourselves in terms of real estate development. I hope that real estate folks remain as conservative as they have in creating new supply.”

Roschelle said he's seeing that conservative behavior in Dallas-Fort Worth and it has kept the market from getting ahead of itself despite the ever-growing demand and push for growth.

As for what makes North Texas the one to watch next year, he said several factors come into play.

“The things that have been important in years past have been markets that have low cost of living and low, relative to the national average, cost of doing business. That’s where companies want to be and that’s where people want to be,” Roschelle said.

The low cost of living, low cost of doing business and tax efficiency continue to draw people to Dallas-Fort Worth, he said. And so much so that the area’s population growth rate is projected to be more than two times the national average in 2019.

“The growth in the population is skewed towards younger folks in Dallas,” Roschelle said. “The growth in the 0 to 24 age category is high and in the 25 to 40 category. [The population] is becoming younger, and those people are all the workers for the future.”
But as the population in the Metroplex grows, affordable housing is becoming more of an issue. Although affordable single-family homes are a contributor to Dallas-Fort Worth’s success, there aren’t enough of them, according to the report.

The report says focus group respondents in the Dallas area pointed to an increasingly prevalent “not in my backyard” mentality as the reason for the slow down in available workforce housing.

“Dallas traditionally was a place where there was a piece of land, and if someone wanted to build on it, they just built on it,” Roschelle said.

Now, though, developers are often met with a “you’re not building that thing near me” attitude, which tends to add hurdles like cost and time, he said. This contributes to the problem that Dallas-Fort Worth is facing with additions to housing supply not keeping pace with demand.

What the Dallas area has going for it, though, is a diverse and stable employment base thanks to the wide spectrum of industries represented in the area, Roschelle said. The report indicates that the market is expected to have high growth and low volatility when it comes to employment in 2019.

Here are a few things the report says to keep an eye on in 2019:

Best bets
  • Industrial development investments: With the expansion of the e-commerce industry, industrial facilities, which are seeing historically low vacancy rates, will continue to be in high demand. "Barring a trade war of serious proportions, industrials offer great risk-adjusted returns," according to the report.
  • Garden apartments: "While the multifamily sector registered an overall NCREIF total return of 6.38 percent, the garden apartment component was near a double-digit total return at 9.33 percent," the report says. Appreciation in value is what accounted the over-performance for such properties. And the pricing for garden apartments, or low-rise complexes typically with direct access to outdoor space, reflects a higher-yield 5.7 percent cap rate compared to the 4.9 percent cap rate for mid-to-high-rise properties.
  • Quick-flip, value-add deals: Timing with these deals is key, the report says. They should be executed by 2020 to maximize late-cycle opportunity, "and the geographic focus needs to be in markets where assets have not yet been priced to perfection."
  • Redeployment of retail properties: "Many shopping center properties are just not going to come back as successful retail assets," the report says. But many have a potential for alternative uses like mixed use for properties in close-in suburbs or distribution centers that can capitalize on the e-commerce trend.
Issues on the horizon
  • Insurance costs related to increasing natural disasters: The report says the volume of natural disasters in 2018 is evidence that the risk of such catastrophes – "mostly due to climate change" – has been intensifying. Because of this, insurers and reinsurers are experiencing massive payouts and will be pricing this into premiums in the future. "Having adequate coverage and budgeting for increased operating expenses should definitely be high on the list of items that property owners need to watch in 2019," according to the report.
  • Cybersecurity vulnerabilities: Cybersecurity issues that come with increasing interconnectedness have become more and more obvious and have affected many industries including real estate. "One REIT interviewee highlighted a need to establish industry norms and best practices for both primary defense purposes and for evaluating risk/reward parameters stemming from technology," the report says.
  • Infrastructure: Deficiencies in infrastructure are impactful for real estate. The report pulled data from the American Society of Civil Engineers, which shows the multitrillion-dollar shortfalls in investment in key assets and the associated costs that affect businesses. "By 2025, the United States sacrifices $3.9 trillion in GDP and $7 trillion in reduced business sales. Failure to address the issue means 2.5 million fewer jobs created and a shortfall of household income of $3,400 annually," according to the report.
  • Immigration: "The draconian approach to border security is a massive self-inflicted wound with immediate negative economic consequences and long-term weakening of our national growth potential," the report says. The impacts on demand growth, the reduction in the baseline for real potential GDP growth and the implications for bringing the country's fertility rate below population replacement level should be reasons for pause, it says.
 Source: Ballor, Claire. "Why DFW was named top real estate market to watch in 2019". Dallas Business Journal. Oct 10, 2018. Web Nov 1, 2018.