1. COMMERCIAL REAL ESTATE DEAL VOLUME

• After a large swath of investors sat on the sidelines in 2020, last year proved to be the most active year for commercial real estate sales on record. According to Real Capital Analytics, $808.7 billion of U.S. CRE assets changed hands in 2021— an 87.8% increase over 2020’s pandemic impacted total and an equally impressive 34.8% above 2019’s previously held peak.
• Of the core-four commercial property types (Apartment, Office, Retail, and Industrial), the Office sector was the only one to not see 2021 transaction volumes eclipse their 2019 peak. While transaction volumes did rise by a reassuring 56.5% year-over-year, they remained down from 2019’s levels by 3.5%.
• Apartment transaction volumes surged to new heights in 2021, totaling $335.3 billion last year— just shy of the total set in 2019 and 2020 combined. Measured 2021’s deal volume total grew by 128.2% year-over-year. Moreover, last year’s final tally stands 73.6% higher than the total set in 2019.
• Industrial deal volume grew by 56.2% in 2021, the lowest growth rate of the core-four property types. However, the primary reason why the Industrial sector’s relative growth rate is lower than its marketpeers is that it maintained strong transaction volumes in 2020. Compared to the previously held 2019 peak, 2021’s Industrial deal volumes totals finished up by a robust 41.6%
• Retail sector deal volume recovered admirably in 2021, reaching $76.9 billion in asset sales. For the year, transaction volumes grew 87.9% compared to 2020 levels and 16.4% over its 2019 benchmark.

2. JANUARY JOBS REPORT

• According to the Bureau of Labor Statistics, the U.S. economy added 467k jobs in January, according to the latest release.
• While January’s jobs-add was slightly below December’s addition of 510k jobs, it comes amid a typical seasonal slowdown for hiring alongside new records for U.S. COVID-19 cases.
• Wages rose by 0.7% in January month-over-month, and they are up 5.7% since January 2021. The continuing climb in wages is indicative of the market competition for labor, as higher demand during the pandemic recovery alongside tight labor supply has strengthened worker-bargaining power in ways not seen in decades.
• November and December estimates were revised up, adding a cumulative 709k jobs to their initial estimates. In the latter months of 2021, job growth consistently undershot economists’ forecasts. However, in January, the economy outperformed the Dow Jones estimate by more than 300k jobs. This may be evidence of a lag in economists factoring in COVID effects. In November and December, the rapid emergence of Omicron caught many by surprise, dampening employment results compared to most market expectations. In January, the opposite likely occurred as experts priced in high U.S. case counts, but the variant’s impact on the economy proved to be modest

3. UNEMPLOYMENT RATE

• The unemployment rate and the number of unemployed persons was little changed at 4.0% and 6.5 million, respectively, while the labor force participation rate held steady at 62.2%, according to the the latest report by the Bureau of Labor Statistics.
• Since January 2021, the unemployment rate has fallen 2.4 percentage points and the number of unemployed persons is down by 3.7 million.
• The number of workers on temporary layoff increased in January to 959k but remained down by 1.8 million since January 2021. Permanent layoffs changed little in January but remain 1.9 million below January 2021’s estimate. There are currently 1.8 million permanent job losers in the economy.
• Marginally attached workers— meaning they are not actively searching for employment, but who still would like a job, was little changed at 5.7 million while the number of persons employed part-time for economic reasons continued to trend down, standing at 3.7 million in January. Part-timers for economic reasons have declined by 2.2 million in the past year.

4. JOB OPENINGS AND LABOR TURNOVER SURVEY (JOLTS)

• According to the Bureau of Labor Statistics, there were 10.9 million openings in the U.S. as of December 31st, the latest date of availability, little changed from the month prior.
• Hires decreased by -330k to 6.3 million, a rate of 4.2%. Meanwhile, separations, which include quits, layoffs, and discharges, declined by -305k to 5.9 million. The quits rate was little changed at 2.9% but had notable decreases in sectors that had been seeing increasing turnover in the past several months, including healthcare, food services, and construction services.
• In the 12 months ending in December 2021, there were 75.3 million hires and 68.9 million separations, a net gain of 6.4 million.

5. CONSUMER SENTIMENT

• Consumer sentiment fell in January, with the index falling 4.8% from December to a reading of 67.2, its lowest level since November 2011, according to preliminary results from the University of Michigan.
• From February 2020 to April 2020, consumer sentiment experienced a sharp decrease of 28.9% before recovering in the second half of the year. As the pandemic-era-economy rebounded into 2021, so did sentiment. However, over the past nine months, as the Delta and Omicron variants took hold and inflation crept into most sectors, the sentiment index has declined sharply.
• According to the analysis by the report’s chief economist, Richard Curtin, supply chain issues and their glaring effect on purchasing prices largely contributed to both the inflation uptick and subsequent decline in consumer confidence. However, a wage-price spiral has begun to develop over the past few months, while household spending has been elevated by rapidly rising home and stock prices.
• According to the report, overall confidence in government economic policies is at its lowest level since 2014., with geopolitical risk and upcoming interest rate hikes likely contributing to jitters.

6. CMBS DELINQUENCIES

• According to Trepp, CMBS delinquencies reassumed their pattern of declines in January following an increase in December, where the delinquency rate increased for the first time since June 2020. CMBS delinquencies have now fallen in 18 of the previous 19 months.
• The January CMBS delinquency rate was 4.18%, a 39 basis point decline from December. The share of loans that were 30 days delinquent stands at 0.16%, down 33 basis points from December.
• 2.17% of loans by balance missed their January payment but were within the “grace period” of under 30 days delinquent. Loans in the grace period are up by four basis points from December.
• The percentage of loans with a special servicer fell by 42 basis points to 6.33% in January.

7. CASH PURCHASES ON THE RISE

• An analysis by RealtyTrac shows that real estate investor purchases rose from 11.7% of all transactions in Q3 2020 to 16.4% in Q3 2021. Additionally, a majority of investors continue to pay in cash— the share of all-cash purchases rose from 69.5% to 97.0% across the same period.
• The uptick in all-cash purchases is indicative of the competition for home buying as the housing market continues its hot streak amid record-low inventory. Investors who can offer cash upfront without the need for additional financing can often speed up the transaction process, in some cases limiting the need for appraisals.
• Cash purchases have also helped investors rake in significant discounts. According to the report, citing data from ATTOM, investors paid an average of 18.9% less than the median sale price of a home in Q3 2021. However, this effect is waning from earlier in the year— in Q2 2021, discounts to cash-purchasers averaged 29.4% below the median sales price.

8. HOUSEHOLD DEBT

• Household debt levels rose by 7.0% in 2021— the biggest jump since just before the Great Financial Crisis. In total, there is nearly $15.6 trillion of debt on domestic household balance sheets, 70% of which is in the form of mortgage debt.
• Rising mortgage debt was the overwhelming biggest contributor to rising household debt levels in 2021. Through Q4 2021, outstanding mortgage debt held by households is up by 8.8% year-over-year. Moreover, mortgage debt is responsible for 87% of the $1.0 trillion increase in total household debt incurred in 2021.
• Student loans, which account for the second-largest source of household indebtedness, reached $1.6 trillion through the end of 2021— a new all-time high even as interest accrual on Federally guaranteed student loans remain frozen through May 1st, 2022. Still, the 1.4% student loan debt increase marks the smallest change for the category in the lifetime of the New York Federal Reserve’s tracking, dating back to 2003.

9. FANNIE MAE HOUSING SURVEY

• Fannie Mae’s January National Housing Survey indicated broad pessimism in the housing market. The survey also showed consumers becoming more pessimistic about home purchasing as only 25% of respondents felt it was a good time to buy, down from 52% just a year before. Only 15% of respondents aged 18-34 thought January 2022 thought it was a good time to buy.
• Almost 91% of respondents expect that home rental costs will stay the same or go up with the average expected price change of around 7.4%.
• Average expectations for home increases were half of that, but a majority expected to pay higher interest rates for home purchases. Despite expectations for increased costs, two-thirds of respondents noted that they would buy a home if they were going to move.

10. GATEWAY MARKETS VS. SMALLER CITIES

• An analysis by the New York Fed suggests that real estate investments in big U.S. cities tend to yield lower returns compared to their smaller counterparts.
• The difference can be somewhat sizable, with small cities offering an annual return premium of approximately 80 basis points. The author points to risk assessments as the primary driver of the return spread.
• According to the report, smaller markets offer a return premium relative to larger markets because they are seen as riskier given that their market tends to be less liquid and less correlated with underlying factors like income growth

SUMMARY OF SOURCES
• (1) https://app.rcanalytics.com/#/trends/downloads
• (2) https://www.bls.gov/news.release/empsit.nr0.htm
• (3) https://www.bls.gov/news.release/empsit.nr0.htm
• (4) https://www.bls.gov/jlt/
• (5) http://www.sca.isr.umich.edu/
• (6) https://www.trepp.com/trepptalk/monthly-snapshot-cmbs-cre-clo-banking-january-2022
• (7) https://www.globest.com/2022/02/09/real-estate-investor-cash-home-purchases-on-the-rise/
• (8) https://www.newyorkfed.org/microeconomics/hhdc
• (9) https://www.fanniemae.com/research-and-insights/surveys/national-housing-survey
• (10) https://libertystreeteconomics.newyorkfed.org/2022/02/housing-returns-in-big-and-smallci

 

We are ready to assist investors. For questions about Commercial Real Estate Investments and Commercial investment properties, contact your Los Angeles and Long Beach commercial real estate advisors at SVN Vanguard. 

 

By Monsef Rachid | February 4, 2022

According to the Mortgage Bankers Association’s latest CREF Loan Performance Survey, delinquency rates for mortgages backed by commercial and multifamily properties declined during the final three months of 2021.

“The fourth quarter saw continued improvement in the performance of commercial and multifamily mortgages, particularly among property types that were the most impacted by the downturn,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “The share of outstanding balances that are delinquent fell for both lodging and retail properties, as property owners and lenders and servicers continue to work through troubled deals. The share of loan balances becoming newly delinquent was the lowest since the onset of the pandemic.”

Key Market Findings for December 2021:

The balance of commercial and multifamily mortgages that are not current decreased slightly in December 2021.

• 97.0% of outstanding loan balances were current, up from 96.7% at the end of the third quarter of 2021.
• 1.9% were 90+ days delinquent or in REO, down from 2.2% three months earlier.
• 0.2% were 60-90 days delinquent, unchanged from three months earlier.
• 0.3% were 30-60 days delinquent, unchanged from three months earlier.
• 0.7% were less than 30 days delinquent, down from 0.8% from three months earlier.

Loans backed by lodging and retail properties continue to see the greatest stress, but also saw improvement during the fourth quarter of 2021.

• 10.5% of the balance of lodging loans were delinquent, down from 14.0% at the end of the third quarter of 2021.
• 7.6% of the balance of retail loan balances were delinquent, down from 8.2% three months earlier.
• 2.1% of the balances of industrial property loans were non-current, up from 1.8% three months earlier.
• 1.8% of the balances of office property loans were non-current, unchanged from three months earlier.
• 1.4% of multifamily balances were non-current, up from 1.3% three months earlier.

Because of the concentration of hotel and retail loans, CMBS loan delinquency rates are higher than other capital sources, but also saw improvement during the final three months of 2021.

• 5.7% of CMBS loan balances were non-current, down from 7.2% in last year’s third quarter.
• Non-current rates for other capital sources were more moderate.
• 2.2% of FHA multifamily and health care loan balances were non-current, up from 2.0% three months earlier.
• 1.6% of life company loan balances were non-current, up from 1.2% three months earlier.
• 0.6% of GSE loan balances were non-current, unchanged from three months earlier.

 

By Lynn Pollack | February 01, 2022

Inflation is as high as it’s been in years, but that’s with respect to goods and labor.

Developers should break ground on new projects now, while the cost of capital remains low—despite rising inflation, according to one industry expert.

“The question my clients ask me almost every single day is, do I put the shovel in the ground today or do I wait a year from now when we might see lower inflation. The bottom line is it’s better to put the shovel in the ground today,” CBRE’s Spencer Levy told CNBC last week. “Yes, inflation is as high as it’s been in years, but that’s with respect to goods and labor. But the cost of capital is still relatively low.”

Levy predicts that demand will keep pace and shortages in housing and industrial will persist into the next year, and says “the cost of capital is lower today than it will be a year from now.”

When asked if we’re approaching bubble territory, Levy said he isn’t worried.

“One of the great things about the commercial real estate industry is that it’s somewhat self-regulating with the respect to the type of construction you’re seeing, he told CNBC most construction is in high-demand, low-supply property types like industrial and multifamily, not in sectors like office or retail.

“As a matter of fact, if you take a look at last year, we saw unbelievable rent growth in multifamily and industrial, the areas where we’re seeing the most construction,” he pointed out. And while that rent growth won’t continue at the same eye-popping levels we’ve seen as of late, Levy told CNBC he expects advanced growth in 2022 and beyond as long as rate hikes stay within the three- to five-hike band most experts are predicting.

“Long term, modestly rising interest rates and inflation has actually been good for commercial real estate, both for rents and for property values,” he said. But “if we’re wrong on these three, four, five rate hikes, and it’s much worse than that, then you should be concerned. But if it stays in that band it’s a very favorable environment for commercial real estate.”

In fact, Levy says that even if the 10-year Treasury goes up by 100 basis points, “that’s still an incredibly low cost of capital by any measure.”

Still, it is hard to ignore that headline inflation is up 7.1% from last year, the biggest uptick since 1982.

“The Fed looks a bit panicked,” CBRE’s Richard Barkham, Global Chief Economist and Global Head of Research, said last month. “At the moment, we’re at peak inflation and I suspect it will stay there for the first half of the year and then begin to ease. It should settle back in the 2 to 3 percent range by year’s end, which is still higher than the pre-pandemic norm of about 1 to 2 percent.”

Barkham says “three rate hikes this year should be enough,” noting that while the hikes will “unnerve” the stock market, strong corporate earnings will support them.

 

By Jeffrey J. Smith | November 17, 2021

Economic, social, and digital disruptions combine to force a change in how CRE is developed, financed, and used

As we turn the corner on 2021, hopes that we would be doing the same on COVID-19 have stalled. The Delta variant has clouded the near-term outlook as vaccination, masking, and social distancing requirements have impacted commercial work and gathering facilities. The commercial real estate (CRE) industry is positioned at the forefront of the recovery: Office employers are balancing productivity and safety; retailers face critical turning points in an evolving industry; residences are competing for tenancy amid shifting migration patterns and heightened affordability concerns. Meanwhile, companies face increasing demands to prioritize environmental, social, and governance (ESG) issues, aging technology infrastructures, a tightening labor market, and increasingly differentiated competition. How the CRE industry proceeds into early 2022 could set the foundation for its success over the next several years.

Here are the key findings from Deloitte’s 2022 commercial real estate outlook:

Despite some financial concerns and an evolving regulatory environment, optimism around fundamentals prevails. Eighty percent of respondents expect their institution’s revenues in 2022 to be slightly or significantly better than 2021 levels.

Most firms continue to depend on legacy technology systems, which could hamper progress and their ability to innovate. Eight in 10 respondents do not have a fully modernized core system that could easily incorporate emerging technologies.

Many CRE firms are focusing on retrofitting properties and repurposing spaces for alternate uses to maximize value. However, only one-quarter of respondents say their companies are substantially increasing technology investments to bolster portfolio and asset management capabilities.

Sustainable properties are often key to a better tenant experience; building partnerships to provide new offerings to tenants can also enable real-estate-as-a-service (REaaS). Over three-fourths of respondents say their companies will likely expand partnerships with or invest in proptechs, which could help firms deploy the REaaS delivery model.

As the CRE industry develops long-term, return-to-work strategies, flexible working arrangements, organizational purpose, and demand for technology skills will shape the talent landscape. The tight labor market is bringing workforce issues to the forefront, such as well-being, ESG, and adopting a more individualized approach to where work gets done (remote/office/hybrid). Our survey indicates CRE employees want their firms to be more purpose-driven.

Most CRE companies are in the early stages of addressing climate risk; respondents indicated sustainability concerns, and the need to address them were priorities in this year’s survey. But in the wake of the pandemic and community demands for more equitable playing fields, CRE leaders should also prioritize social issues and diversity, equity, and inclusion (DE&I) initiatives. The CRE industry has a long way to go to achieve equitable representation.

As the CRE industry develops long-term, return-to-work strategies, flexible working arrangements, organizational purpose, and demand for technology skills will shape the talent landscape.

The tight labor market is bringing workforce issues to the forefront, such as well-being, ESG, and adopting a more individualized approach to where work gets done (remote/office/hybrid). Our survey indicates CRE employees want their firms to be more purpose-driven.

Most firms continue to depend on legacy technology systems, which could hamper progress and their ability to innovate.

Eight in 10 respondents do not have a fully modernized core system that could easily incorporate emerging technologies.

Real Estate Industry Services