Category: Commercial

Retreat of Negative Rates Isn’t an All-Clear for Investors: Mohamed A. El-Erian

A large-scale retreat by central banks from ultra-low rates and accommodating balance sheet policies does not appear imminent.

(Bloomberg Opinion) — Negative-yielding government bonds have been a significant force for a superb year of investment returns for both stocks and bonds, and many are welcoming their recent decline as an indicator of what will support the next leg up in valuations. Yet the evidence remains mixed, suggesting a more nuanced approach to longer-term investing.

The growth and persistence of negative-yielding debt in 2019 has done more than deliver attractive price appreciation on government bonds. It has pushed investors to take on more risk, pushing up the price of assets from investment-grade and high-yield corporate bonds to emerging markets to, of course, equities. It has also encouraged companies to intensify their financial engineering, often involving debt issuance to pay for stock buybacks. And it has supported a range of mergers and acquisitions.

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Seven CRE Economists Offer Their Predictions for 2020

We asked seven economists and researchers about their 2020 predictions for the U.S. commercial real estate market.

As we get ready to greet another year, NREI asked seven industry economists and researchers about their predictions for 2020. For the most part, they expect the U.S. commercial real estate market to remain stable, bolstered by strong employment, positive consumer sentiment and low interest rates. But some experts we interviewed caution against political headwinds and a potential global slowdown.

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Investors Hit the Pause Button on CRE Debt Strategies

Private equity investors allocated a lot of capital to CRE debt plays over the past few years. That trend has been slowing of late.

Private equity real estate funds have stepped up to be a major source of financing for the commercial real estate industry—and a bigger allocation for investors. However, fund managers may face a tougher road ahead for fundraising in the near term as capital flows to the sector slow.

Debt strategies have moved from the fringe to a more established and accepted part of the commercial real estate investment universe over the past several years. That shift has generated a significant wave of capital. According to London-based research firm Preqin, global private equity real estate debt funds have raised about $165.6 billion since 2013.

“Over the last three years in particular we’ve seen a massive amount of capital allocated to debt funds,” says Todd Sammann, executive managing director and head of credit strategies at CBRE Global Investors. The vast majority of that capital is targeting double-digit returns and is almost entirely allocated to closed-end funds. “The industry has seen fundraising trail off a little bit in 2019, which is not particularly surprising given the amount of capital that was formed,” says Sammann.

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Breaking Down CBRE’s 2020 Market Outlook

CBRE provided NREI with an exclusive sneak peek at its 2020 Real Estate Market Outlook report.

CBRE sees more growth ahead for the U.S. commercial real estate industry in 2020, although the pace of expansion could slow thanks to already strong fundamentals that will be tough to improve upon combined with some broader economic headwinds as part of its 2020 Real Estate Market Outlook. Specifically, uncertainty surrounding trade negotiations, weakness in manufacturing and the approach of the presidential election season will hang over the industry in 2020.

Still, the report predicts a “very good year” for the industry.

CBRE provided NREI an exclusive first look at the outlook report. Investment sales volumes should remain near peak levels and industry fundamentals in most sectors will remain strong as well, according to the forecast.

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Commercial and multifamily originations surge in Q3

Strong market expected to continue into 2020

Commercial and multifamily originations surged in the third quarter, the latest Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations from the Mortgage Bankers Association stated.

Commercial and multifamily originations rose 24% from the third quarter of 2018 and 9% from the second quarter in the third quarter this year, the survey states.

“Low interest rates are supporting strong levels of commercial and multifamily borrowing and lending,” said Jamie Woodwell, MBA vice president for commercial real estate research. “Through the third quarter, every major capital source is lending at a pace above last year’s level. Loans backed by multifamily and industrial properties, and made for life companies and Fannie Mae and Freddie Mac, are all running at a record pace.”

And what’s more, this pace is expected to continue even into 2020.

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The U.S. Commercial Real Estate Market Remains Strong Despite Global Economic Concerns

Many savvy investors thought the markets reached its cycle peak a few years ago. That turned out not to be the case.

Ten years since the economic expansion started after the Great Recession, commercial real estate remains strong. Many real estate professionals and investors expected markets, including real estate, to contract sooner, entering hyper-supply.

At the 2015 CCIM Institute’s annual conference Sam Zell, the founder and chairman of Equity International, discussed the sale of his multifamily portfolio with more than 23,000 apartments to Starwood Capital Group for $5.4 billion. He believed that it was an opportune time to sell his portfolio; and, many real estate professionals believed that he had sold at the top of the market, based strongly on his foresight in 2007 to sell his office portfolio before the market crashed. Obviously, taking profits off the table is a win, but were there more profits to realize? Since then, multifamily properties have continued their run, driving prices even higher and squeezing cap rates even more.

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Making Their Mark: The Growing Influence of High-Net-Worth Investors in Large-Scale Commercial Real Estate

Non-billionaire HNW investors are increasingly competing on large-scale commercial assets.

Not so long ago, the vision of high-net-worth (HNW) investors in commercial properties entailed doctors and lawyers passing the hat at the country club in an effort to buy an eight-unit apartment complex in town or the retail strip across the street from church. In recent years, however, this image has been washed away in a veritable flood of HNW capital propelled by increased sophistication and growing incentives.

Billionaires have long been a fixture in this landscape. For instance, the late Paul Allen’s Vulcan Real Estate has led the redevelopment of Seattle’s South Lake Union neighborhood with billions of dollars invested in 37 construction projects. These homegrown ultra-rich are complemented in U.S. commercial real estate acquisitions by the investments of sheiks from the Middle East, Chinese billionaires and other uber-wealthy foreign nationals. However, these family offices are essentially institutions themselves.

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Eight Common Mistakes HNW Investors Make When Buying Commercial Properties

From trying to close deals on their own to focusing too much on returns, HNW investors should try to steer clear from these costly missteps.

Money mistakes are a fact of life. In a survey by consumer comparison website Finder.com, 78 percent of Americans confessed to making at least one financial gaffe.

Such mistakes typically carry greater consequences for high-net-worth (HNW) investors, though. One slip-up in a commercial real estate deal could easily cost millions of dollars.

To help HNW investors avoid expensive blunders, we’ve compiled a list of eight common mistakes they make in commercial real estate, along with strategies for sidestepping those errors.

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Total Return Growth for All Commercial Property Types Will Slow to 5.7 Percent in 2019, PREA Survey Forecasts

PREA’s latest survey forecasts moderating returns on commercial real estate properties.

The results of the latest consensus forecast survey from the Pension Real Estate Association (PREA) show that respondents expect total unlevered return growth on commercial real estate assets traded at the institutional level to moderate in 2019. Respondents expect that total returns on all commercial property types, as represented by the NCREIF Property Index (NPI), will average 5.7 percent next year vs. 7.1 percent in 2018 and will decline to 4.4 percent in 2020.

Return growth will decline the most for industrial properties, with an expected average return of 8.2 percent compared to 12.4 percent this year. By 2020, survey respondents expect returns on industrial acquisitions to slow to 5.7 percent, PREA reports.

Retail properties, on the other hand, will likely experience slightly higher returns in 2019, at 4.3 percent, indicating a 10-basis-point increase from 2018, in survey respondents’ estimate. By 2010, however, respondents forecast returns on retail acquisitions to average 3.8 percent.

The declines will likely come from slowing appreciation in asset values, as returns from income are expected to remain fairly stable from 2018 through 2010, moving by at most 20 basis points for all four core property types covered by the survey. However, survey respondents forecast that both office and retail properties will experience negative return appreciation by 2020—by 0.7 percent and 1.0 percent respectively.

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Opportunity Zones, Marijuana-Related Properties and Retail Assets Among Best CRE Bets for HNW Investors in 2019

Wealth management experts and CRE professionals discuss the types of properties HNW investors should pursue in the coming year.

As high-net-worth (HNW) investors zone in on commercial real estate opportunities for 2019, Opportunity Zones, multifamily, marijuana, retail and industrial are emerging as some of the key areas to watch.

Real estate investments made next year by HNW investors should be weighed against rising interest rates and the prolonged economic expansion, according to Doug Brien, co-founder and CEO of Oakland, Calif.-based Mynd Property Management, which specializes in multifamily assets.

“For deals to make sense, investors will need to make sure cap rates remain high enough to balance out rising interest rates,” Brien says. “In my opinion, a long-time horizon should be incorporated into any investor’s strategy if they’re acquiring properties at such a late stage in this rising interest rate environment.”

Ross Yustein, chairman of the real estate department at New York City law firm Kleinberg Kaplan Wolff & Cohen PC, echoes the cautious approach espoused by Brien.

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