|Situs RERC Q3 Flash Report: Risk Beginning to Exceed Return for Overall CRE
Situs RERC has released its 3Q 2017 Flash Report of required (i.e., expected) cap and discount rates, investment conditions and other investment criteria based on our preliminary third quarter 2017 survey results.
Highlights of the report include:
- Situs RERC forecasts small, incremental changes in the 10-year Treasury rate over the next two years, with the base case Treasury rate remaining below 3 percent throughout 2018, despite anticipated rate hikes by the Fed;
- Investment trends, as measured by investor ratings of return vs. risk, indicated that the office sector had the lowest return for the level of risk. The office sector is facing headwinds from slowing employment growth, mediocre economic growth, and increased tenant demands for innovative workspace designs;
- The required discount rate decreased 30 bps for the apartment sector compared to last quarter despite the fact that rental growth is expected to decline over the next year. Required discount rates declined for all major property types
The Flash Report offers an initial look at our 3Q 2017 data. As we continue to compile additional investment survey data, it will be integrated with current data and reported in the third quarter 2017 Situs RERC Real Estate Report, the nation’s longest-running and most comprehensive real estate investment report offering investment criteria and investor insights on all the major markets and property types.
Click here to download the full Situs RERC 3Q 2017 Flash Report.
Chicago’s Industrial Boom to Continue into 2018
On the surface, it may look like industrial tenants in the Chicago region took a bit of a breather in the third quarter. Leasing volume in the past three months totaled about 5.2 million square feet, or about 2 million square feet less than in the second quarter, according to a report from JLL. But experts say the market probably still has enough demand to absorb the roughly 15 million square feet that developers have under construction.
“We’ve had a little bit of a blip this year,” John Picchiotti, managing director and Chicago industrial brokerage lead for JLL, tells GlobeSt.com. However, “supply and demand are still in balance.”
He points out that of the 19.5 million square feet of new construction completed year-to-date, build-to-suits account for 8.5 million square feet, or about 45%. “That shows discipline on the part of developers.” In previous development booms, speculative buildings would account for up to 75% of the total.
Developers still have a lot of confidence in the market. In fact, two 1 million-square-foot speculative projects are underway in the I-80 submarket, the most ever at one time in the Chicago region, according to JLL. If this pair goes unused, that could further push up the regional vacancy rate, which just ticked up slightly to 7.66%.
“When you build a 1 million-square-foot building, that really moves the needle,” says George Cutro, JLL’s director of industrial research. But if the developers can land tenants relatively quickly, “everybody will be happy,” and that would spark even more new construction. On the other hand, if the structures stay vacant for six months or so, that would introduce some nervousness into the market.
read more: GlobeSt
Regulatory Playing Field for Banks, Nonbanks Is Anything but Level
Policymakers in Washington often strive to make the regulatory playing field level. But federal oversight of mortgage bankers has been anything but equitable.
The Consumer Financial Protection Bureau was given authority to examine both bank and nonbank mortgage lenders, the idea being that nonbanks should not escape federal supervision because they were not FDIC-insured. But the fact is that 99% of banks (those with assets of less than $10 billion) are exempt from CFPB supervision. The same cannot be said about small, independently operated nonbanks.
It is time for officials to pursue policies that truly make the playing field level so that all mortgage providers — nonbanks and banks — can continue to drive the housing recovery.
That is the central conclusion of a report the Community Home Lenders Association released last month on “independent mortgage bankers” (also known as IMBs).
First, it is important to understand the definition of “independent mortgage bankers.” Paradoxically, they are not banks at all, in the sense we normally think of banks, since IMBs are not FDIC-insured depository institutions. Instead, IMBs are nonbanks that typically fund their operations through a combination of warehouse loans and putting their own personal capital at risk.
read more: American Banker
U.S. SEC Moves to Simplify Corporate Compliance Paperwork
The U.S. Securities and Exchange Commission proposed rules on Wednesday to simplify the disclosures that publicly traded companies must file with the agency when communicating with investors.
President Donald Trump has vowed that his administration will cut red tape for businesses and SEC Chairman Jay Clayton endorsed the proposed rules at his first open meeting on Wednesday.
Under the new rules, aimed at lightening the compliance burden, companies may omit some references to risk factors and incorporate online references like hyperlinks that could reduce paperwork.
The new rules were conceived under the presidency of Barack Obama and have broad support.
“I am supportive of today’s proposal because it would make some modest and marginal changes to our disclosure framework,” said Commissioner Kara Stein, the only Democrat on the three-person SEC panel.
read more: Reuters
Fed Still Puzzled by Inflation, but Rate Increase Is on Track
The persistence of slow inflation was the dominant topic at the Federal Reserve’s most recent policy-making meeting in September, but most officials were still inclined to raise the Fed’s benchmark interest rate later this year.
The Fed is likely to raise rates so long as the medium-term economic outlook remains unchanged, according to an official account of the meeting that the Fed published on Wednesday.
The account said that recent hurricanes had not disrupted that outlook. The Fed expects slower growth for a few months, but it does not expect a long-term effect.
The Fed next meets Oct. 31 and Nov. 1, but investors expect the Fed will wait to raise its benchmark rate at its final meeting of the year, in December. The Fed has held rates at a low level to encourage economic growth; by raising rates, it is slowly ending that stimulus campaign.
The Fed said after the September meeting that it would begin to reduce its holdings of Treasury securities and mortgage-backed securities, which it accumulated beginning in 2008 as part of the effort to reduce borrowing costs for businesses and consumers. The Fed is now shaving $10 billion from its portfolio each month. It will add another $10 billion to the monthly total each quarter next year, until it reaches a monthly pace of $50 billion.
read more: NYT
Suburban Offices Are Cool Again
First you leave the city for a kid, a garage, and a backyard. Then you get a job in an office park — only maybe it’s an office park with yoga and food trucks.
For millennials, the suburbs are the new city, and employers chasing young talent are starting to look at them anew.
For years companies like Twitter, Salesforce, and GE have headed downtown, framing their urban offices as recruiting tools for young talent. After opening a new headquarters in downtown Chicago last year, Motorola Solutions bragged that it got five times the job applicants it had in the suburbs. Suburban landlords like Charles Lamphere kept hearing a common refrain from tenants: “We need to go to the city to get millennials.”
Fresh college graduates might be attracted to downtown bars and carless commutes, but these days, for older millennials starting families and taking out mortgages, a job in the suburbs has its own appeal. “What people find is that the city offers a high quality of life at the income extremes,” says Lamphere, who is chief executive of Van Vlissingen & Co., a real-estate developer based in the Chicago suburb of Lincolnshire, Ill. “The city is a difficult place for the average working family.”
read more: NREI
Floating-Rate Loans: A Good Fit for Today’s Multifamily Market
In 2007, fixed-rate funding was the norm in multifamily finance as well as in other commercial asset classes. Only the pension funds, sovereign wealth funds and a few very large, institutional real estate companies made use of floating-rate loans. But the last five years have seen a change in the way multifamily real estate is financed. Although fixed-rate loans still dominate the market, private equity funds, smaller middle-market investors and even family offices now embrace floating-rate options when it is accretive to their investment strategies.
By 2009, rent growth had dropped into negative territory, according to the Federal Reserve, but when it recovered, it recovered robustly. Since 2012, multifamily rents have been growing about 3 to 4 percent per year (although several markets are currently experiencing much lower rental growth rates). With rents rising at this rate, investors became more confident that they could realize the yields they sought in less time. The three- to five-year hold periods they could secure with a floating-rate loan provided a better match for their investment needs than a 10-year or even a seven-year fixed-rate. In effect, floating-rate financing enabled them to accelerate their investment cycle.
Floating-rate loans also provided multifamily investors with a solution to another post-recession challenge — the influx of new money that drove up valuations in many cities. The lower start rate of floating-rate loans — combined with the increasing availability of one to five years of interest-only payments — helped investors make their numbers work in ways that fixed-rate loans could not.
read more: Commercial Observer
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