Month: September 2020

Cross-Border Investment Dropped Sharply in the First Half of 2020. But Foreign Buyers Will Come Back.

In spite of the current situation, global real estate investors still have a favorable view of the U.S. market.

While cross-border capital flows have declined considerably in the second quarter, industry sources expect foreign investors to return some time next year.

Cross-border investment sales activity fell sharply to $3.9 billion in the second quarter of 2020 due to the overall slowdown caused by the pandemic. Foreign investors represented 8 percent of total U.S. investment activity during the period, well down from the 22 percent high mark set in 2015, according to a recent report from data firm Real Capital Analytics (RCA). For the whole first half of 2020, cross-border investment in U.S. commercial real estate dropped by 34 percent year-over-year, according to a report from real estate services firm CBRE. JLL estimates foreign investment volume decreased by 29 percent in the first half of 2020 compared to the first half of 2019.

Industry sources maintain this pullback is not a sign of global investors writing off the U.S. as an investment destination.

“In some ways, the environment is quite good for foreign capital [investment] into real estate because the hedging costs have just dropped right down,” says Richard Barkham, global chief economist at CBRE. “We have got some pretty hot sectors in industrial and logistics. The U.S. has always been seen as the highest performing economy in the world. So, we do expect that investment to come back.”

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    Negative Real Rates Aren’t Reversing Anytime Soon: Paul Podolsky

    Money has flowed into the economy in a short period of time without sparking inflation or causing real rates to rise and should open the door to more aggressive fiscal action.

    (Bloomberg Opinion) — The collapse in real interest rates to below zero means the U.S. government is being paid to borrow and spend. This is obviously rare, but that doesn’t mean the situation will soon reverse. Absent a low probability event like mass civil unrest or a balance of payments crisis, about the only thing could spur real rates to turn positive would be a massive infrastructure plan by the government.

    Now would seem an ideal time for the government to borrow and spend to fix the nation’s increasingly creaky infrastructure. The World Economic Forum ranks the U.S. 13th in the world in terms of the quality of infrastructure, well behind places like Singapore, Switzerland and Germany. But although there is bi-partisan support for additional infrastructure spending, plans put forth by both Republicans and Democrats are too small to move the needle in terms of boosting economic growth by enough to meaningfully push real interest rates, or those after accounting for inflation, back above zero.

    This has enormous implications for financial markets. Declining real rates have been the tail wind behind the 40-year upswing in the stock market. Real rates, especially those at the longer end of the yield curve, are a key factor for investors in determining the appropriate price-to-earnings ratio for equities. In short, the lower the real rate, the higher the ratio investors should be willing to accept. But should real rates rise, asset markets will need to re-price, potentially demolishing popular bets like those on technology stocks, gold and illiquid credit assets.

    Although tighter coordination between fiscal and monetary policy coordination make it much easier to pull off a big infrastructure program, I’m betting the government is too timid take advantage of the remarkable opportunity in negative real rates. As a result, I’m sticking with an asset allocation that benefits from real rates staying low or even becoming more negative.

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      U.S. Commercial-Property Prices Fall with Worst Yet to Come

      Year-to-date through July, hotel prices fell 4.4 percent, retail prices 2.8 percent office prices 0.9 percent, according to Real Capital Analytics.

      (Bloomberg)—U.S. commercial real estate prices are falling as the economic toll of the Covid-19 pandemic worsens — and the decline is just getting started.

      Indexes for office, retail and lodging properties all slipped year-over-year in July, data from industry tracker Real Capital Analytics Inc. show. Transaction volume plummeted to $14 billion across all sectors, down 69% from July 2019.

      “The worst is yet to come,” Real Capital Senior Vice President Jim Costello said in a telephone interview. “We’re not seeing the fallout yet of owners selling properties and taking a loss.”

      Commercial real estate deals have been in a deep freeze as lenders give borrowers slack to defer payments and landlords are reluctant to drop asking prices. That may change in the next few months as debts mount and the outlook dims for retail, hotel, office and even apartment properties that already suffered from oversupply before the pandemic hammered the U.S. economy.

      “I wouldn’t be surprised if we start to see some of it start to break in September or October,” Costello said.

      Hotel prices dropped 4.4% in the year through July, while retail declined 2.8% and offices fell 0.9%, according to Real Capital. Apartment building prices climbed 6.9%, and industrial values rose 8.3%, leading to a 1.5% gain for all property types in the period.

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