Archives for March 2021

Debt funds are pushing leverage to 75% or 80%.

An argument can be made for downward pressure on cap rates for popular assets like industrial and multifamily and recovery types like senior housing and retail.

Rising interest rates are unlikely to push cap rates up this year, counter to what many investors may believe, according to new analysis from Marcus & Millichap.

The interest rate on ten-year Treasuries has nearly tripled since the end of July, when it was at an all-time low near 50 basis points. But rates remain near historical lows, a good sign for investors, according to John Chang, Senior Vice President and Director of Research Services at Marcus & Millichap.

It’s true, Chang says, that there’s been upward pressure on rates for the last six months, and some economists have increased 2021 forecasts to the 8% range.

And “normally that kind of growth—especially when fueled by trillions in stimulus—will put upward pressure on inflation, and of course the counterbalance on inflation is to push interest rates up,” he says. “But that said, inflation remains exceptionally low,” at a “tame” 1.3%. Generally, the Fed wants to see inflation in the 2% range, according to Chang.

So why exactly are rates rising? “Falling uncertainty and expectations of growth,” Chang said. “Because we can see the light at the end of the pandemic tunnel and the investor market expects growth to be strong in 2021, money is flowing out of safe havens like bonds and Treasuries and into growth investments like the stock market and yes, real estate. That flow of money is putting upward pressure on interest rates”

Chang also challenges the commonly-held investor beliefs that cap rates move with interest rates. “Historically, that’s not true,” he said. “Yes, over decades both have trended together. But when you look at year to year movement the spread narrows and expands.”

For example, in pre-recession 2007, the yield spread narrowed to just 200 bps, while it opened to 580 bps during the Great Financial Crisis, when interest rates went down and cap rates went up.

The current spread is 480 bps, Chang said. “Economists have a bullish outlook for 2021,” he noted. “Liquidity is good and rates low. Investors are increasingly less fearful of the pandemic.”

Chang posits that even if rates rise, they probably won’t push caps rate up. He says an argument can be made for downward pressure on cap rates for popular assets like industrial and multifamily and recovery types like senior housing and retail.

“I encourage every investor to set aside the idea that interest rates and cap rates will move together,” Chang said. “Focus instead on the outlook for each asset. What’s on the horizon for demand driers and supply risks? That combination can put the long-term context of an asset into a much better perspective.”

Source: “Here’s What Rising Interest Rates Mean For Cap Rates“

Thirty percent said they will have a majority of employees working remotely between two and three days for a week.

As office re-openings get closer, a surprising number of CEOs are looking for a return to pre-pandemic office uses, according to the 2021 CEO Outlook Pulse Survey from KPMG.

Only 17% of respondents said that they will downsize their company’s footprint. In KPMG’s August 2020 survey, 69% of CEOs said they would reduce their office footprint. On top of that, only 30% said they will have most employees working remotely between two and three days for a week.

Only 14% of respondents said they will examine shared office spaces to increase employee workplace flexibility.

For office landlords, these findings are good news, especially in light of the more pessimistic predictions of what will happen to office space once the world returns to normal.

For instance, a February survey of nearly 200 people from CoreNet Global said workers will spend roughly half of the workweek at the office and the remaining time either in a home office, remote location or co-working space once the pandemic ends.

With fewer workers coming in, companies will need less space. Fifty-four percent of the companies surveyed say the overall corporate footprint is expected to be smaller two years from now. Fourteen percent expect to see a decrease of greater than 30% in space. Another 31% see a reduction of 10% to 30%, while 9% predict a decrease of less than 10%.

In a segment on CNBC’s ‘Squawk on the Street,’ Brett White, Cushman & Wakefield’s CEO and executive chairman, said the number of people working from home could double from 5% to 10%. An additional 30% of office workers were allowed to work from home one or two days a week before the pandemic. White thinks that number will jump 50% to 60% after the pandemic.

Overall, White could see companies with these agile workforces reduce their footprint by 10%, 15% or even 30%.

One open question in the KPMG survey is exactly when life will return to normal, even with vaccinations ramping up. Thirty-one percent of respondents anticipate a return to normal in 2021, while 45% expect normality in 2022, according to KPMG. Twenty-four percent of respondents say their business will change forever.

Sixty-one percent of companies said that they are waiting for a successful vaccine rollout in their key markets before they ask staff to return, according to KPMG. Three-quarters, 76%, say they will wait for governments to encourage businesses to return to normal, while only 5% will initiate returns based on competitive factors.

Source: “Only 17% of CEOs Now Plan to Downsize Their Office Footprint“

At the March 2021 Virtual LIN Meeting, 8 excellent properties were presented.
Thank you for presenting properties and attending the meeting!

View the March 2021 LIN properties here.

View the March 2021 LIN Thank Yous here.