Monthly Archives: November 2019

Puppy Dogs, Rainbows and Three Caps

A nation’s overall happiness is not necessarily based on the strength of its economy.

Take Japan, for example. Its economy hasn’t grown much in almost 30 years, but it has one of the highest standards of living in the world and, according to a recent study by the CATO Institute, is the third “least miserable” country on earth. The U.S. is the 28th least miserable out of 95 countries ranked by CATO, which derives the rankings by the sum of each nation’s unemployment, inflation and bank lending rates minus the percentage change in real GDP per capita.

As I turn 50 this year, I’ve begun to think a lot more about things money can’t buy: more time with my kids, a decent first baseman on the Baltimore Orioles and the pursuit of happiness. I also wonder what’s happiness worth? While happiness is great, it may be a bit overrated. Based on seven independent studies, happiness peaks at the ages of 16 to 18 and 86 to 88. Everyone else—and this means you—is pretty much at the nadir of miserable for most of their lives.    

So, what is happiness worth? The eternal sunshine of the spotless mind, ignorance is bliss and happiness is a warm gun (thank you John Lennon) all sound pretty good to me and sound even better as I get closer to my 86-year-old fountain of new happiness! And if happiness is measured by cheap stuff (i.e., a $500, 68-inch smart TV) and more free time, then 2019 is a good year. Technology and innovation have made all stuff cheaper (though services costs have skyrocketed) and many big employers are experimenting with four- and even three-day work weeks as knowledge-worker productivity has increased.

The problem is that the same forces that are increasing our happiness—particularly innovation that, due to efficiencies in things like electric cars, makes us use less stuff—are also slowing economic growth. These four forces are too much cheap money, cheap labor, cheap energy and innovation itself. So we may be happier, but we are in for slow growth, low inflation and low interest rates for a long time. Big deal you say, at least we are happy! Well, I like puppy dogs and rainbows as much as the next guy, but I can’t put them in my 401(k), which requires growth and cold hard cash.

The silver lining to lousy growth is lower cap rates for commercial real estate. In short, because growth has slowed globally, we are in a seemingly permanent environment of lower interest rates and inflation. This lowered cost of debt capital, combined with the increasingly lower cost of equity capital as both international investors and large U.S. domestic institutions increase their allocations to U.S. commercial real estate, means that cap rates can and likely will get lower. U.S. growth may be slowing, but the country’s relatively high-yielding (compared to bonds) commercial real estate is the cleanest dirty shirt in the global investment laundry.

“I can’t believe I’m paying a four cap.” Just wait. European inflation is falling, and the U.S. is following suit. EU cap rates are typically 50 to 100 basis points lower than U.S. cap rates for comparable assets because of lower inflation. Lower inflation ahead means lower cap rates are the latest luxury European export that will line the pockets of U.S. commercial real estate investors in the form of declining cap rates across the board in core markets like New York, Los Angeles, San Francisco and Washington, D.C.   Don’t be surprised when the three cap becomes the new four cap in the U.S.

Jamie Dimon, Alan Greenspan and a lot of other smart folks believe that the 10-year Treasury rate could go to zero to match the $17 trillion of zero or negative interest rate bonds globally. This means commercial real estate investors investors will do well in the years to come. With slower growth, my 401 (k) may be a disappointment in my golden years, but at least I’ll be happy (particularly if I buy a puppy)!

By Spencer Levy, Chairman, Americas Research & Senior Economic Advisor, CBRE.

How Large is the U.S. Multifamily Rental Market?

Newly-released Census data provides some clarity to the size of the multifamily rental market and how its size compares to other types of housing in the U.S.

Note that vacant units are not included. The Census calculated a total of 17.0 million vacant homes in 2018, including second homes.

Multifamily housing of all types (rented and owned) totaled 31.4 million units and represented 25.8% of the total housing stock of 122 million units in 2018.

Of the 31.4 million units, 27.2 million (86.5%) were known to be renter-occupied units.

The rental multifamily housing total represented 22.4% of all occupied housing in the U.S.

Very small multifamily properties—the 2-to-9 unit category—had a surprisingly high total of renter-occupied units of 12.7 million units.

The data confirmed the enormity of single-family rental market. At 14.7 million units, it was still smaller than rental multifamily, but single-family rentals represented 12.1% of the total.

Single-family owner-occupied housing still dominates the U.S. housing landscape at 68.6 million occupied units and 56.4% of the 2018 total.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

Why Brexit Could Prove to be a Blessing in Disguise

The UK’s long term average share of global real estate investment is about 13%. Until early 2016, the level of UK investment moved in sync with the global total.

In the run up to the UK’s historic Brexit vote on June 23, 2016 a divergence appeared. Investment fell sharply and then fell further after the referendum, before rebounding in 2017 and 2018.

More recently, as uncertainties have once again increased, London investment volumes have been notably lower with the market experiencing a substantial deterioration and transaction volumes in Q3 2019 down circa 50% on the same period last year.

Notably over the last four years across the Eurozone, yield compression has knocked 200 basis points (bps) off income returns, a trend from which the UK has been immune with Central London yields remaining flat. Additionally, European cities are trading at a 150 bps premium to the long term average, whereas London remains level.

As a result, this differential now means that prime London offices are trading at a substantial discount and are offering favourable investment yields compared to similar assets in all of the major Eurozone capitals. This strategically positions London real estate for a rebound in activity once the Brexit dust settles, particularly for Eurozone investors who can benefit from Sterling’s significant depreciation.

Savvy investors with a long perspective may see this as a once in a generation opportunity to buy assets in the world’s fifth largest economy.

Furthermore, with current prime yields in major European cities seemingly still comfortably above the “net zero hurdle” of historic depreciation and management cost, this suggests that yields could compress even further in the short term if low interest rates continue to drive fixed income investors into real estate.

From the UK perspective, the fact that the gap between the “net zero hurdle” and prevailing yield is largest in London – and ahead of Paris and Frankfurt by some 100-125 bps – further supports the argument that greater relative value is to be found in the UK, and that once political turmoil is resolved a degree of “catch up” yield compression could take place.

There is a deep pool of international capital with an appetite to deploy into the UK and the lack of yield compression is making London look very good value. Coupled with the backdrop of an extremely robust occupational market, we are now expecting Central London office yields to fall in 2020 and Brexit could in fact be a ‘blessing in disguise.’

By James Beckham, Head of Central London Investment, CBRE

Multifamily Developers Seize Opportunity

Opportunity Zones have been discussed at length since their inception in Q1 2018. Interest is high, and 300+ investment funds had targets to raise ±$50 billion to invest in Opportunity Zones as of Q2 2019.

The impact of Opportunity Zone incentives is mixed and should be described in nuanced terms. Overall, investment volumes appear to be primarily influenced by cyclical factors. Total investment in Opportunity Zones since the creation of incentives (Q1 2018), transactions have accounted for 10.5% of overall U.S. volume.

The share of volume in these zones remains largely unchanged compared with the 18 months prior to the program (10.7%). Furthermore, annual volume growth in Opportunity Zones has been quite reflective of the broader market throughout the entire cycle, even during the past 18 months (6.7% vs 7.2%) when compared with the preceding 18 months.

While transaction volumes do not appear to have an impact on aggregate demand, demand has shifted around in some ways and there are meaningful localized impacts, including the rise in development site acquisitions since the start of the program.

Development Site Acquisitions Stand Out

Development site investment in the period from Q1 2018 through Q2 2019 totaled $87 billion and was 14.6% higher than the 18 months preceding the program. In contrast, investment outside of Opportunity Zones was only 1.2% higher than the six months leading up to the program.

Development of raw land is one of the most straightforward ways to deploy capital and maintain compliance with program regulations, thus qualifying for tax benefits. As a result, transaction activity for opportunity zone development sites has increased sharply, indicating some impact in this segment of the market.

Investment in land sites for multifamily development experienced particularly significant gains since Q1 2018. Multifamily development site acquisitions jumped 66.2% from the 18 months leading up to the program while development sites for all other property types experienced either losses or only moderate gains over the same time period.

Multifamily site investment accounted for 35.1% of all development site buying in Q1 2018 through Q2 2019. In the prior 18-month period, multifamily represented 24.2% of total development site investment.

In terms of the dollar value of construction starts, multifamily represented over one-half (53.2%) of the total commercial real estate value invested in Opportunity Zones over the last 18 months. Consequently, the estimated dollar value of completions is expected to rise through the end of 2019.

Site Investment by Location

New York City, Los Angeles and San Jose led in investment volumes of development sites since the start of the program. Secondary markets such as Salt Lake City, Denver and the Inland Empire had strong showings in terms of absolute gains as well as total volume.

It is also worth noting that these cities have attractively-located opportunity zones—even encompassing downtown areas in some cases.

The top five markets for percentage increases were Baltimore (896%), Birmingham (728%), Boston (572%), Philadelphia (479%) and Denver (413%).

Clearly, the increased buying activity of development sites in these markets were driven by many transactions that would have taken place regardless of incentives. Favorable locations and other transaction characteristics were also drivers. Still, significant multifamily development is taking place in Opportunity Zones and tax incentives will only help steer more capital into blighted communities.

By George Entis, Senior Research Analyst, CBRE

Homeownership Gets Boost From Ageing Millennials

Homeownership in the U.S. continued its ascent in Q3 2019 boosted by increased buying from an ageing millennial population.

The homeownership rate reached 64.8% not seasonally adjusted and 64.7% seasonally adjusted. Both rates rose 0.4 percentage point from Q2 and year-over-year.

The homeownership rate has been gradually rising for three years following a decade-long decline. Q3 marked the largest quarterly increase since Q3 2016.

Tailwinds for homeownership include low mortgage rates, low unemployment and millennials moving more firmly into lifestages where homeownership is traditional.

Yet, the financial challenges of buying a house and the mismatch between consumer demand and available housing product present headwinds.

I believe the homeownership trend will continue the slow upward course it has been on for three years. Rates will level off far below the 2004 peak of nearly 70%.

Youngest Cohorts Have Largest Gains From Trough

Homeownership for the 35-to-44-aged households—half Gen Xers, half millennials—had the largest year-over-year increase in Q3 (0.8 point). The under-35 cohort—nearly all millennials—experienced the next largest increase (0.7 point).

The 45-to-54 age group—all Gen Xers—had the third largest year-over-year gain (0.4 point). Homeownership fell for the 55-to-64 year old households—all baby boomers.

Historically, from the 2004 peaks to the 2016 troughs in homeownership rates, the largest declines occurred with the younger cohorts. Homeownership in households aged 35 to 45 years old fell 12.1 percentage points and the under-35-year-old households fell 9.5 percentage points.

Since the troughs, however, these two cohorts have also experienced the largest increases in homeownership rates. Homeownership of the youngest households rose 3.4 percentage points since the trough, compared to the gain of 1.9 points for all ages. Households aged 35 to 45 years old experienced a 2.3 percentage point gain.

Homeownership rates for the 65+ year olds and for the 55 to 64 year olds have experienced minimal movement since the trough three years ago (1.0 point and 0.4 point, respectively).

South & West Have Largest Rise

Regionally, the Midwest maintained the highest homeownership rate in Q3 (69.0%). Homeownership in the South and West regions rose 0.8 and 0.4 percentage points from a year ago.

By metro, Los Angeles had the lowest homeownership rates in Q3 (48.2%), followed by New York, Orlando, San Jose and San Francisco. Metros with lower rates typically have either high housing costs or high levels of in-migration.

Lifestyle & Housing Costs Influence Trends

During the 2008 recession and in the early years of recovery, the stressed economy and uncertain individual household finances contributed greatly to reducing homeownership rates. Yet homeownership rates continued to fall even as the economy and households began to get back on their feet.

In recent years, many non-economic lifestyle factors have influenced homeownership trends, including marrying later than previous generations, starting families later and placing a higher value on housing flexibility (renting allows for more mobility). The greater social acceptance of renting than in previous generations and the increased popularity of urban living (where renting is more common than owning) have also kept homeownership gains subdued.

Surveys have shown, however, that most renters want to own a home at some point. Therefore, the rising cost of housing is the major deterrent to homeownership. U.S. home prices have risen by about 6% annually since the recession with significantly higher increases in many markets. (Note, however, that this year, mortgage rates have been coming in quite low, thereby mitigating the cost of homebuying. As of October 24th, 30-year fixed-rate mortgages averaged 3.75% according to Freddie Mac.)

The biggest trend which should be driving homeownership rates higher is demographics: aging millennials. Homebuying increases with age, and millennials are moving into homeownership, albeit at a slower place than previous generations.

BJeanette Rice, Americas Head of Multifamily Research, CBRE.

Data Takes Center Stage

Thriving technologies such as virtual reality, artificial intelligence, and cloud computing are leading to rapidly increasing global demand for faster connectivity and data storage.

Though still considered a relatively young asset class, investor appetite for data centers—the gigantic warehouses that hold vast numbers of computer servers that store, process, and distribute data—continues to grow in line with technology, which has impacted upon many areas of modern life and business. 

North American data center investment volume totaled more than $12 billion in 2018 (inclusive of single-asset, portfolio and entity-level transactions), according to CBRE research. Capital availability remained abundant throughout the year, with 33 percent of total investment volume focused on single-asset and portfolio transactions. This year’s volume is anticipated to total more than 2018 levels with several large M&A transactions closing.

Kristina Metzger, who oversees the Data Centers specialty practice for Capital Markets at CBRE, focuses her time advising domestic and offshore investors in the disposition and acquisition of these properties across North America.

Metzger has extensive knowledge and experience in data center real estate, having represented clients in transactions totaling more than $3 billion. Capital Watch caught up with Metzger to discuss this growing sector of commercial real estate that is rapidly moving into the mainstream, her career to date with CBRE, and how she balances work and family. 

What Does Your Role at CBRE Involve?

I collaborate with our investment sales, Debt and Structured Finance, and colleagues in the data center leasing space on the acquisition, disposition and recapitalization of data centers and telecom facilities across North America. I also work with our Global Workplace Services account relationships to execute monetization strategies for enterprise-owned facilities.

What is CBRE’s approach to Data Centers Capital Markets?

We engage the best team of diverse subject matter experts on each and every project. This often times means collaborating with our local office or industrial professionals, market leasing specialists, as well as data center facilities management and construction management. I am continuously impressed and motivated by the industry-leading talent at CBRE and so grateful to be able to work with these leaders.

What’s Been Your Biggest Success This year?

Growing CBRE’s market share and presence. In our first 12 months, we will achieve a 400% increase in transaction volume in data center asset sales. Our high percentage of the overall market share gives us a distinct advantage in driving value for our clients and achieving the best outcomes.

What’s Been Your Biggest Challenge?

Getting the word out about CBRE’s capabilities in the data center capital markets space. It is widely understood within the data center community that CBRE is the world’s largest data center facilities manager and we have a great team of real estate leasing specialists. Our access to global capital and investment banking capabilities are less known. We are working tirelessly to grow our brand recognition in these areas. 

Are There Any Industry Misconceptions About the Sector That Need to Change?

I am frequently asked if cloud computing will eliminate the need for data center facilities moving forward. It is quite the opposite. Cloud computing is driving the need for more data centers. As we all increasingly access information remotely all of that data needs to be stored. Around 90% of the world’s data was created in the last three years – the data center market continues to see exponential growth as a result.

How Do You Achieve a Successful Work/Life Balance?

I am fortunate to have a great support network of friends and family both inside and outside of the office. Our household is very dynamic as my husband and I both work full-time and equally parent our two sons, Gavin (3) and Conor (1). We would not be able to do it without the great support of close friends, family and incredible colleagues. Our boys do a great job of keeping me balanced and reminding me what is most important, to stop and smell the roses, or in our case, to run around and play in the dirt.