September 17, 2019
With the current state of the U.S. economy in flux, Marcus & Millichap recently held a webinar focused on real estate investment strategies for a changing economic climate.
Marcus & Millichap CEO Hessam Nadji hosted the online event and was joined by Scott Holmes, national director of retail; Alan Pontius, national director of office and industrial; John Sebree, national director of multifamily and John Chang, national director of research services.
“The analysis of this economic expansion that we have been on shows that from a durability perspective, it is now the second longest expansion we have seen since the 1950s,” said Nadji. “And it has a chance of being the longest on record. So, the concerns about running out of time are valid. But if you look at the pace of job creation and the pace of inflation, it has not been alarming. In our current case, although we agree the risk for a recession is higher, the fundamental strength of the economy is not a reason to worry.”
In response to concerns that we are reaching the end of the expansion, lending has tightened. However, capital is still widely available from a number of sources. Marcus & Millichap’s John Chang pointed to growth in CMBS lending, as government agencies like Fannie Mae and Freddie Mac have eased back lending through 2019.
“From a commercial real estate standpoint, overall lending has tightened somewhat over the past few years,” said Chang. “It’s reducing some of the risk we normally see in a growth cycle. Construction loans in particular have tightened substantially so that it begins to mitigate the risk of overdevelopment we were beginning to see in some property types.”
Ahead of the Federal Reserve’s meeting on September 17 and 18, Chang predicted the agency would lower short-term rates again and said it would be a surprise if anything else were to occur.
“Interest rates are very volatile,” he said “They are moving very fast. Any shred of good news about meetings with China is boosting those treasury rates. So, we are getting some positive news about a meeting in October, and as a result we’ve seen the 10-year treasury rate rise by about 10 or 20 basis points in the last week or so.”
“For real estate investors, that is the most important indicator,” added Nadji. “As most mortgage rates are tied to the 10-year Treasury or at least the pattern of the 10-year Treasury.”
On the multifamily development side, the webinar reported that apartment fundamentals are currently sound, with investment activity remaining elevated.
Apartment absorption has been sustained by a preference to rent and steady job growth. Although new construction has been elevated compared to historical standards, the U.S. is still faced with a housing shortage.
“We’re not overbuilding and in fact we’re not even satisfying demand,” said Sebree. “From a numbers standpoint in 2019, we will create more than 1.3 million new households. Total multifamily and single family units delivered are only going to be 1.2 million.”
In the class B and C multifamily sector, Nadji added that if anything there is a supply reduction by addition. Around 50% of all new multifamily developments being delivered are in 10 metros.
“There’s a lot of secondary markets that are growing at a very good rate right now and they are just not seeing that new construction like the New York, LA and Atlanta markets for example,” said Sebree.
Another potential problem area, according to Sebree, is a lack of workforce housing. He noted that while Class A vacancy has remained around 5% over the past few years, Class C vacancy has dropped from around 7% to 3.8%. The workforce housing supply is not increasing so it has continued to put pressure on working class households.
In the office sector, limited development and sustained job growth has fostered positive supply and demand balance. Additionally, co-working and flex space concepts continue to offer mixed impact for the office market.
“Given the turn in the recovery on both a demand side and a lack of construction leading to very high vacancies, as well as the fact that office prices haven’t appreciated to the degree that apartments have,” said Nadji. “Office may be a value investment right now.”
Suburban office product has also shown positive trends and offers an upside opportunity, according to Alan Pontius. The vacancy gap of what we would call suburban office compared to the urban core has narrowed from a 230 basis point spread to today an 80 basis point spread.
Going forward, while a recession may be imminent, Nadji said it won’t necessarily be as catastrophic as the global financial crisis of 10 years ago.
“Eventually, the country will have a recession,” said Nadji. “That’s a forgone conclusion. But, not every recession is going to be a repeat of the global financial crisis we saw in 2008 and 2009. If the trade wars play out as an all-out trade war, that could be a problem. But we don’t anticipate that happening.”
For comments, questions or concerns, please contact David Cohen