Commercial Real Estate: Industrial still provides the best return vs. risk, Situs RERC survey respondents say

Industrial still provides the best return vs. risk, Situs RERC survey respondents say

The overall commercial real estate (CRE) market has become more attractive from a return vs. risk perspective, but sentiment about risk-adjusted returns varies by property type.

That’s according to data gathered for the 3Q 2018 Situs RERC Real Estate Report, “Under Pressure,” which was released last week. The Situs RERC institutional survey respondents’ ratings are based on a scale of 1 to 10, with 10 indicating that return far exceeds risk.

Here’s how the respondents rated the major property types:


The return vs. risk rating for office improved from 4.6 in 2Q 2018 to 5.1 in 3Q 2018 and is now near the post-recession average rating of 5.2. The return vs. risk rating generally declined from 1Q 2015 to 3Q 2017, but has recently shown signs of an upward trend; return and risk are more closely aligned for the office market.


The return vs. risk rating increased slightly quarter over quarter (QoQ) but dipped year over year (YoY). Nonetheless, the industrial sector rating remained above average, indicat­ing that return outweighed risk in the sector, and continued to have the highest rating among the property types at 5.7. The industrial sector has consistently been among the highest rated sectors from a return vs. risk perspective. In most quarters since the global financial crisis (GFC), it has been the highest rated sector. There has been a general down­trend in ratings since 4Q 2015, but the rating has remained above average since 2Q 2009.


The retail sector’s return vs. risk rating rose QoQ from 4.3 in 2Q 2018 to 4.9 in 2Q 2018. Despite the improvement, the retail sector still had the second-lowest return vs. risk rating among the property types, ahead of only the hotel sector. Investors may be becoming more optimistic about the retail sector; its return vs. risk rating has improved over the last two quar­ters. The rating hasn’t reached equilibrium since 1Q 2017, after a stretch of 17 straight quarters with ratings of 5.0 or above, dating back to 4Q 2012.


The return vs. risk rating for the apartment sector declined slightly QoQ from 5.4 to 5.3, while it increased YoY from 4.8. After a steady fall in the ratings from 2012 to 2016, the return vs. risk rat­ings have been somewhat volatile over the past two years. Since 3Q 2016, investors have mostly seen return outweigh risk in the sector.


The return vs. risk rating for the hotel sector decreased from 5.0 in 2Q 2018 to 4.8 in 3Q 2018 and YoY from 4.9. The rating indicates that the sector’s return and risk are near equilibrium, but well below the post-recession peak of 6.4 in 4Q 2010 and on a generally downward trend since 1Q 2014.

For overall CRE, Situs RERC’s institutional respondents rated return vs. risk for overall CRE at 5.2, up from 4.8 the previous quarter and from 4.7 a year ago, as reported in last week’s Newswatch.

Situs RERC provides a high-level view of the CRE investment environment. We base the return vs. risk on our own professional knowledge of the CRE mar­ket, data from third-party sources and information collected from industry experts, including our cli­ents and institutional survey respondents.

Next week in Newswatch, we’ll provide an in-depth look at results in the quarterly report for value vs. price regarding the major property types.

Our full results are available in our 3Q 2018 Situs RERC Real Estate Report, “Under Pressure.” Our report is the nation’s longest-running real estate research report offering investment criteria and investor insights on all the major markets and property types.

Visit our website or call 319-352-1500 for subscription information.

After Amazon HQ2, uproar in New York over real estate ‘insider trading’

Amazon’s deal for a second headquarters in Long Island City, N.Y., has prompted a state senator to draft legislation that would prohibit the buying or selling of real estate based on any nonpublic government action.

The proposal follows a Wall Street Journal article about Amazon employees who went shopping for condos in Long Island City shortly before the giant retailer announced plans to open a new headquarters there, which immediately drove up residential demand and prices. The employees are now under contract to buy, brokers said.

The new New York law would be similar to federal securities law that bars an individual from purchasing stock in a company based on nonpublic information.

“Insider trading is illegal in the stock market but in real estate it is not only legal, but celebrated with champagne,” said real-estate attorney Adam Leitman Bailey.

Read more: Wall Street Journal

US factory activity jumps in November while construction spending falls for third month

U.S. construction spending fell for a third straight month, government data showed on Monday, while private-sector figures showed an uptick in manufacturing order growth but offered a mixed view on overall factory activity.

The data comes as many investors are watching for signs the Federal Reserve’s three-year tightening cycle could be coming to a close after an expected hike this month, which would be the fourth by the U.S. central bank this year.

The Commerce Department said total construction spending fell 0.1 percent to $1.31 trillion in October, while economists polled by Reuters had forecast outlays rising 0.4 percent.

The figure rose 4.9 percent on a year-over-year basis. The Commerce Department also revised its September construction figure, previously reported as unchanged, to show a 0.1 percent decline.

Read more: CNBC

Ikea is downsizing and moving into Manhattan with its first ‘city center’ store in 2019

Furniture retailer Ikea will shrink its typically massive store to open its first location in Manhattan with a new “city center” format in 2019, the company said Monday.

Next spring, Ikea will open its first smaller-format shop in the U.S. at 999 Third Avenue in New York, where it will sit alongside Bloomingdale’s, Home Depot and CB2. The company previously announced it planned to open 30 of these “city center” locations over the next three years.

Ikea has a store in nearby Brooklyn, but this will be the first location on the island.

Ikea’s move into Manhattan comes as many retailers, including Target, Kohl’s and Macy’s, are shrinking their existing full-size stores or experimenting with opening up smaller-format locations in densely populated markets such as Manhattan, Los Angeles and Chicago. As more and more shoppers are turning to the internet to ring up purchases, companies are finding they don’t need as much real estate.

Read more: CNBC

Payless scores with mock-up luxury shop

Payless ShoeSource created a viral sensation and earned widespread media coverage by opening a “fake luxury store” and duping fashion influencers into purchasing Payless shoes at exorbitant prices.

The store, named “Palessi” after a made-up Italian designer, Bruno Palessi, opened in a former Armani store in Santa Monica, CA. The company designed a luxury setting to support the ruse, displaying shoes on glass shelves and gold mannequins, launching a sleek website and Instagram account, and bringing in camera crews and velvet ropes for the grand opening.

The store was stocked with Payless shoes that typically sell between $19.99 and $39.99 but marked up with price tags between $200 and $600.

The attendees were recorded raving about the merchandise. One said, “They are elegant [and] sophisticated,” according to a video posted on YouTube. Another said, “I could tell it’s made with high-quality material.”

Read more: Retail Wire

Interest rates likely to rise this month, Federal Reserve meeting notes show

The Federal Reserve is poised to raise interest rates at its next policymaking meeting in mid-December and to continue raising rates next year, according to the minutes of the central bank’s last meeting published on Thursday.

The minutes said most Federal Reserve officials were confident about the economy when they met in early November.

Some Federal Reserve officials at the meeting said they were less certain about the economic outlook and about the Federal Reserve’s policy plans. But the account of the meeting provided no indication that the central bank is preparing to pause, notwithstanding the hopes of investors and frequent public attacks by President Trump.

“Almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon,” barring unpleasant developments, the minutes said.

Read more: New York Times

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