Archives for April 2021

Andrew Thornfeldt, managing director at Chatham Financial, thinks investors are over-reliant on the forward curve when trying to understand where interest rates are heading.

“Over a 10-year period, since the creation of LIBOR, it’s never been more advantageous to enter into a fixed rate swap versus floating on LIBOR,” Thornfeldt says.

Over a five-year period, it has only been more advantageous to go fixed rate 11% of the time, according to Thornfedt. “So we’re looking at a pretty extreme benefit to going floating over fixed at least as it relates to swaps versus LIBOR over longer periods of time,” he says.

Typically, institutional real estate investors use interest rate projections in their overall leveraged buyout or discounted cash flow model. “That is a very common assumption,” Thornfeldt says. “A huge percentage of the institutional commercial real estate world ends up using that as a key input into their acquisition models, their debt models or whatever DCF [discounted cash flow] model they’re using to make investment decisions.”

Thornfeldt urges investors to consider other scenarios that could show a little bit more volatility. He thinks they should look at a period where rates dropped the most and how that impacts cash-on-cash returns, their levered IRR and DCF model.

“Then, of course, there are some more nuanced scenarios where you say, ‘If I was to look at a five-year investment horizon and I wanted to shock the system for a two or three-year period, what’s the most volatile interest rate environment for two or three years? Then assume some stability after that?,” he says. “How does that impact my levered IRR and my levered returns or cash on cash?”

Those are some of the environments that investors should consider.

“Depending on your risk tolerance, you may or may not want to take into consideration the most extreme examples that have happened historically,” Thornfeldt says. “It would be imprudent not at least to consider exploring outcomes that have happened historically within the timeframe you’re now in.”

While the forward yield curve has value, Thornfeldt says it’s necessary to evaluate several other environments and a wide range of scenarios. “What you evaluate should likely be tied to your risk tolerances and project-specific dynamics,” he says.

Thornfeldt proposes evaluating a wide range of potential future interest rate environments before making investment decisions. Some typical environments to explore include historic rising and falling rate environments, hawkish and dovish Fed policy environments and forward curve shocks.

Thornfeldt thinks investors should look back in time to see how interest rates performed over their hold time.

“Whatever my analysis period is, what’s the timeframe where interest rates went up the most over that time period,” Thornfeldt says. “Why don’t they apply that historic interest rate environment over their analysis period, whether that’s the next two, three, five or 10 years.”

Source: “The Mistake You Are Making When Trying to Project Where Interest Rates are Headed”

If companies want happy workers, they need to give them choices.

That’s the theme from a Cushman & Wakefield and CoreNet Global survey of 339 people from over a dozen countries.

While flexibility is important, respondents indicated that 100 percent remote work is not ideal for most employees. Pre-pandemic, 59% of respondents described their company’s approach to work as office first. Post-pandemic, that number dropped to 10% as 58% of respondents indicated that they wanted to go to an office-first hybrid. After the pandemic, only 18% of respondents said that “mostly working in company offices” described their approach.

“We see a real opportunity for smart employers to transform the workplace experience with flexible options for employees by offering a variety of locations and experiences to support convenience, functionality and well-being,” said Despina Katsikakis, global leader of Cushman & Wakefield’s Total Workplace Global Lead in a prepared statement.

Still, one-third of respondents, including 39% of C-suite respondents, say that companies will allow employees to live anywhere regardless of company office presence.

Millennials are leading the drive to remote work. Fifty percent of that cohort said remote work was better for work-life balance. Nearly 40% of Gen Xers and Baby Boomers said the same thing.

Forty-eight percent of respondents in the Americas said that they were considering changes to their remote work policy. Another 22% said they have already announced changes in remote work policies.

Still, the office plays an important role. Eight-one percent of respondents said it was best for casual, impromptu conversations. Another significant group, 75%, said it helped establish a connection to company culture.

The pandemic has changed attitudes around assigned seating to collaboration spaces and working in “third spaces” (neither home nor the office).

Only 28% percent said “mostly assigned seating” described their approach. Forty-five percent said “mostly open seating” described their workplace.

“When we asked about the physical work environment, we saw significant movement in people’s views and approaches post-pandemic. There is a shift away from “owned” spaces and a move towards flexible space. People want flexibility—including virtual options and collaboration spaces,” said Sandy Romero, senior analyst at Cushman & Wakefield, in a prepared statement.

This theme of flexibility is resonating throughout the industry. A recent JLL survey of 2,000 office workers revealed that two thirds want to work from different locations post-COVID, and office owners are responding by “actively increasing” the space in their buildings devoted to flex work.

“This is more meaningful than a shifting of deckchairs,” says Ben Munn, managing director of flex space at JLL, in the report. “Companies and investors are taking a different view on flex space entirely and are willing to invest because they see this as a bigger proportion of the overall office market than it is currently.”

Source: “The Office is Becoming More Agile”