A Quarterly Publication Summarizing Industry News and Real Estate Market Trends.
in the NEWS
Goldman: The Search for Yield is Just Getting Started
A new note from Goldman Sachs Group Inc. underscores the extent to which life has grown vastly more complicated for bond managers, with a staggering 90 percent of actively-managed high-yield debt funds now failing to meet or surpass their benchmarks this year.
“As funds play catch-up to their benchmarks, bond managers are more incentivized to step down the quality spectrum to find alpha [outperformance],” Bartlett wrote. “We believe this will intensify the ‘search for yield’ that has already been set in motion by easy global monetary policy.
Property Sector Stats Worth Noting in 2016
Nearing the end of first-quarter 2016, both global and domestic issues are leaving their mark on the U.S. real estate industry. The U.S. dollar grew stronger while other currencies weakened. Domestic employment numbers are picking up. The Federal Reserve opted to leave its key interest rate unchanged for the time being. Certain property sectors are shaping up well (industrial, office, multifamily) and others are on uncertain ground (retail, hotels). Cap rates are going sideways pretty much across the board.
Here we share key points from research and brokerage firms about how various real estate sectors will fare in the year ahead.
Apartment Market Yet to Hit Peak
Regarding the multifamily sector, Kessler noted that speculation is growing that the sector is approaching its peak. He rebutted that suggestion, however.
“I think [the multifamily sector] has a long way to go still because we’re so far away from the norms as far as supply and demand,” Kessler said.
The millennial generation is having a “huge impact” on the apartment market, according to Kessler, with concentrations in urban areas and central business districts. That has helped prop up rent growth in secondary markets such as Minneapolis and Pittsburgh, Kessler said.
This is what a $700 Billion Bond-Market Bubble Looks Like
Central bankers’ easing policies, along with bank capital and liquidity rules that make holding bonds more attractive, have inflated the bond market by a huge $700 billion (£481 billion) since the 2008 financial crisis, according to Deutsche Bank. That increase has come at the expense of the stock market.
Here’s Deutsche Bank analyst Parag Thatte (emphasis ours):
Beyond any negative signal further monetary easing sends on underlying growth prospects, historically falling bond yields with the attendant capital gains on bonds have seen inflows rotate into bonds at the expense of equities.
The Drop in Oil Prices has had a Negligible Impact on CRE
Still, despite the doom and gloom reported in the media, the impact from lower oil prices has yet to be seen in overall real estate statistics. Apartment asking rents in the U.S. climbed 4.6 percent in 2015, slightly above what we had forecasted as of the third quarter for year-end growth, which was 4.5 percent. Office rents climbed 3.1 percent in 2015, which was slightly lower than our third quarter forecast of 3.3 percent. The annual (2015) rent growth for retail and industrial properties was also only 10 and 20 basis points lower, respectively, than we had forecasted as of the third quarter.
Even markets such as Houston saw apartment market rent growth of 4.6 percent in 2015.
QUOTES of the quarter
The Morgan Stanley analysts have got it wrong! Commercial real estate prices will not be flat for 2016,” says Torto, who notes that his forecast figure is for average NOI growth for all property types. “First, I expect to see NOI growth this year and, with what I believe will be a relatively steady cap rate, higher NOI levels will lead to some price growth. While other industries are in earning recession, I do not think that is true for commercial real estate and will not be true for commercial real estate unless the economy goes into a recession in 2016, which I do not expect.”
-Raymond G. Torto | Lecturer, Harvard Graduate School of Design, and former global chief economist for CBRE
Further expansion of U.S. payrolls will generate new rental households and support a 5 percent jump in the average effective rent this year. Positive demographic trends in the millennial and baby boomer segments will also spur new demand and underpin solid asset operations.”
– Marcus & Millichap National Apartment Report
20 to 34 Year Old Population
Marcus & Millichamp Report – Page 11
“Demographic trends will underpin solid operations as millennials entering the workforce and forming households and older adults downsizing from owner-occupied housing combine to form the leading edge of new demand. Millennials comprise an especially formidable and vast force; more U.S. residents are in their early 20s currently than at any time in history. The single-family housing market also continues to provide a lift to apartment demand. Higher downpayment requirements, limited construction of starter homes and stringent mortgage underwriting continue to suppress single-family home purchases by first-time buyers. These trends are delaying the transition from rentals to single-family homes, and the extended residencies in apartments that result are mitigating turnover and re-leasing concerns for multifamily property owners.”
“Whether for lifestyle choices or an aversion to homeownership arising from the devastation of the housing bust, multifamily rentals remain an overwhelmingly favored housing choice for new households. More than 80 percent of the new households formed since U.S. employers resumed hiring in 2010 occupied rentals, nearly three times the rate in the period of identical length preceding the recession.”
-Marcus & Millichap National Apartment Report 2016