Bringing It All Together
Some analysts are concerned that the U.S. economy will weaken over the next few quarters as a result of high energy prices, further erosion of the housing market and slower growth overseas. But the economy is seeing an unusual combination of indicators that benefit commercial real estate. Consider the following:
- Job growth has picked up, averaging a respectable 233,000 per month from February through April – 253,000 in the private sector. This will boost leasing activity.
- While job growth has ramped up, interest rates have moved in the opposite direction, a rare combination that has caught some high-profile bond investors off guard. The yield on the 10-year Treasury note dropped to 3.07 percent yesterday, its lowest level in more than five months and a decline of about 50 basis points in the last six weeks. This move, if sustained, could put downward pressure on cap rates and mortgage rates, boosting property values.
- Corporate profits reached a new high as reported yesterday by the Bureau of Economic Analysis – more evidence that businesses have the capacity to hire and invest.
- Inflation remains low, particularly when energy prices are stripped out, but it could become a problem down the road; look no further than the weak dollar, high gold prices and the worrisome national debt. As inflation rises, replacement costs for existing properties also rise, as do lease payments from the escalation clauses built into most leases. The reputation of commercial real estate as an inflation hedge is likely one factor behind its attraction for investors.
- Banks have begun loosening standards for commercial real estate lending according to the Federal Reserve, and CMBS issuance is expected to hit $40 to $50 billion by year-end compared with $12 billion last year and $3 billion in 2009. Although many lenders are struggling with distressed loans, others see opportunity in this industry.
- Indeed, investment activity is up. The dollar volume of sales through the first four months of this year is 87 percent above the same period in 2010 according to Real Capital Analytics.
- Stock market investors see it the same way. The Dow Jones Equity All REIT Index is up 7.8 percent year-to-date compared with the 5.4 percent gain posted by the S&P 500.