On January 27, 2022, I attended a Marcus & Millichap webinar titled: “Economy – Inflation – the Fed – Commercial Real Estate.” the featured speaker was Henry Paulson Jr., the 74th Secretary of the Treasury 2006-2009. Other speakers were:
- Hessam Nadji, President and CEO, Marcus & Millichap and Host
- Robert Hart – Founder and CEO, TruAmerica Multifamily
- Tom McGee – President, ICSC (International Council of Shopping Centers)
This article offers a summary of trends and opportunities and my observations from the recent webinar.
First, some Observations
My take: we are coming out of an artificially created “Recession.” While there is core strength in the economy (low unemployment, relatively high and steady GDP growth,) some fundamentals are weak.
Because of the pandemic, the Fed pumped a lot of money into consumers’ hands over the past two years. While there has been significant spending, which shored up the economy, there is still significant liquidity in consumers’ hands. When the economy fully opens up to travel, more money will flow into an already inflated economy, driving up prices further.
As a result of Quantitative Easing, the Fed is holding significant excess Treasury Bonds, about $9 billion worth. This practice has caused a serious inflation, that hasn’t been seen since the 1980s. Even though many workers and retirees received pay and benefit increases, their income is not keeping up.
The Fed has already indicated they are backing off on this trend. The question is, what will happen if/when they engage in Quantitative Tightening. Almost certainly, interest rates will increase and the value of equities (stocks) will fall. The question is whether the economy will be able to withstand this pressure or fall into another recession.
“Hang on for a bumpy ride!”
Henry Paulson, Jr.
State of the CRE Markets
- The housing market is super-tight. There’s been a 16% increase in median house prices, year over year, to date. There’s only a 2 months inventory of single-family houses. The 2022 Multifamily Vacancy rate is as low as 2.2%. There’ an affordability issue in sunbelt and southeastern states such as Florida, Texas, Arizona and Nevada. (Marcus & Millichap data)
- Equity (dollars) are flowing to the class B sector (and some class C.) Cap rates have fallen across the board. “Three cap is the new four cap.” There is a heavy emphasis on workforce housing. The upside is that an investor buying a multifamily property at a 3.5 cap rate can easily turn it into a 4.5 cap in 12-18 months. There is a lot of upside potential. (Bob Hart)
- Experiential retail has been devastated. (Restaurants, movie theaters, etc.)
- One long-term trend as a result of work-at-home is less management and therefore less need for office space. [the democratization of the workplace?]
Now for some good news!
Marcus & Millichap does an excellent job of monitoring long-term economic and commercial real estate trends. The following are some trends and opportunities to pay attention to in the coming year.
- Equity (dollars) are flowing to the class B sector (and some class C.) Cap rates have fallen across the board. “Three cap is the new four cap.” There is a heavy emphasis on workforce housing. The upside is that an investor buying a multifamily property at a 3.5 cap rate can easily turn it into a 4.5 cap in 12-18 months. There is a lot of upside potential. (Bob Hart)
- Retail openings last year were three times retail closings, so retail is still very much alive. One factor is that retail still functions as a fulfillment center, even with fewer on-site customers. Delivery services still need the food to be prepared in the restaurant, etc. Tom McGee
- Overall, there has always been a spread between the 10-year Treasury rate and CRE cap rates, with commercial real estate consistently out-performing the bond market. Currently it’s about 420 bps. There is lots of room for growth.
Navigating the Landscape
SOFIA Capital Ventures, your “Concierge for Private Commercial Lending” has a direct relationship with 55+ commerial lenders who are keenly attuned to the market. In the last few weeks, we have been introduced to several innovative programs designed to help hedge against inflation and offer commercial real estate investors new ways to leverage their investments. CONTACT US for a free evaluation of any funding request – acquisition, refinance, repurpose, construction, etc. We’re here to serve!
