Archives for October 2021

Steel and Aluminum Prices Make Some Wonder If There’s a Bubble

October 8, 2021 by CARNM

Others think the higher prices are a result of economics 101 and are here to stay for now.

If you’re building with steel or aluminum, you might be wincing with every quote and invoice.

Iron and steel prices are up 95.2%—nearly double—year over year, according to Associated Builders and Contractors.

“Some of the recent setbacks in global supply chain recovery relate to the dislocating impacts of the delta variant, but there are other forces at work, including government policy and geopolitics,” ABC quotes its chief economist Anirban Basu. “As a growing number of nations around the world increase vaccination rates, the global economic recovery should continue. That will put even more upward pressure on input prices, all things remaining equal. Passage of a meaningful American infrastructure plan would further catalyze price increases.”

Prices for aluminum, another important product in building, are up almost as much: a 63% jump year over year.

Conditions are ripe, in other words, for bubble pricing. Steel prices “have turned into a bubble. So, they go higher because they go higher,” CRU Group analyst Josh Spoores told CNBC.

For developers on the ground, the scarce availability of certain products is more telling.

Stephen Bittel, founder and chairman of South Florida real estate firm Terranova Corp., tells GlobeSt.com that his company has a building two-thirds leased out to one client and wants to add a store front for the remaining space.

“We’ve been waiting four months for the steel frames and glass to be available,” Bittel says. “In a normal time, you’d call the storefront guy, they’d come in and measure it and put it in the next week. People are building new multifamily projects and ordering appliances nine months in advance.”

“I think there are a couple of economics 101 issues in play,” adds Bittel. “You go back to the commencement of the pandemic. Whole factories that produce aluminum and steel shut down. When things started to reopen, we continued to put people back to work. When all that happened, the factories that produce all these products, you just can’t start them up. You have to call back all your staff and hope they show up. You have to acquire raw materials before they show up.”

JLL chief economist Ryan Severino doesn’t think this is going to be a frothy bubble that will burst, sending prices falling again. “This feels like a case of demand running up faster than supply which is a widespread issue right now,” he says. “Demand for inputs and final goods has come racing back faster than supply—not just bringing back old capacity but investing in new capacity.”

Severino adds that increased prices “could potentially slow some potential projects or cause marginal ones to get scrapped.” New project costs could go higher, “if not actually threaten their potential to move forward.”

“It doesn’t seem like it’s going to be driven by something other than the economy,” Bittel says. “I think it will get worse before it gets better.”

Source: “Steel and Aluminum Prices Make Some Wonder If There’s a Bubble“

Amid Broader Selloff, Publicly-Traded REITs Took a Hit in September

October 6, 2021 by CARNM

The FTSE Nareit All Equity REITs Index remains up more than 20 percent year-to-date in spite of a step back during the month.

Headwinds that challenged the broader equities market—including questions about the pace of economic recovery and the ongoing battles in Washington, D.C. over raising the debt ceiling and the passage of two major pieces of legislation—took their toll on the publicly-traded REIT sector in September. The FTSE Nareit All Equity REITs Index fell 5.92 percent for the month, although it remained up 21.63 percent year-to-date, as of Sept. 30.

That year-to-date figure beats the S&P 500 (up 15.92 percent through September), the Russell 2000 (up 12.41 percent), the Nasdaq composite (up 12.66 percent) and the Dow Jones Industrial Average (up 12.12 percent).

Meanwhile, Morningstar Analysis delivered a piece of good news for the sector in a new report suggesting the optimal portfolio allocation to REITs—depending on an investor’s risk appetite—should range between four percent and 13 percent.

WMRE sat down with Nareit Executive Vice President and Economist John Worth to discuss September’s returns and the Morningstar findings.

This transcript has been edited for length, style and clarity.

WMRE: It was a rough month for the sector. What are some of the takeaways from these numbers?

John Worth: It was a tough month for equities across the board, including REITs. The S&P ended up down 4.65 percent for the month. The All Equity REIT Index did a bit worse and was down 5.92 percent. And as we looked across the sectors we saw some of the sectors that had performed the best over the past year-and-a-half are some of the ones that had the toughest months.

Infrastructure REITs—which are mostly cellphone towers—were down 9.09 percent for the month, although they are still up roughly 17 percent for the year and had a strong 2020. Data centers were down 7.41 percent for the month, although still up 10.09 percent for the year. Self-storage, which has been having an incredible year, is still up 39.06 percent year-to-date even after falling 8.2 percent in September. Residential REITs are also still up 36.29 percent for the year after falling 4.37 percent in September. And retail is up 32.11 percent for the year, despite falling 5.28 percent for the month.

Lodging/resorts was the only sector with positive results, up 1.27 percent, and up 14.72 percent year-to-date. Timber was only down 80 basis points and is up 9.7 percent for the year, while office was only down 2.8.5 percent and remains up 13.03 percent for the year.

WMRE: Any other big picture takeaways from the month?

John Worth: When looking at REITs relative to the S&P for month and year-to-date, even though both were down, REITs are still outperforming S&P by more than five percentage points for the year.

In addition, when looking at the daily data, REITs were still providing meaningful diversification benefits in the month of September and year-to-date. The correlation coefficient for the year between the All Equity REIT Index and the S&P 500 is 0.6 So, among diversifiers that’s an extremely good diversifier. In September, the correlation coefficient was below 0.5. In fact, there was only one day where both REITs and the S&P were both down more than a percentage point. On other days, one or the other index was down while the other was down substantially less. You could see the diversification benefit providing portfolio stabilization even in a month where all the returns were down.

WMRE: Was there anything at the property level or within a certain sector that drove the results? Or are we mostly looking at the effects of a broader market drop? For example, more companies during the month delayed or canceled plans to return to office.

John Worth: We saw some companies delay their return to office, but we also saw Google buy a very large office building in New York. They are clearly making a bet on the future of work-from-office. And we saw that office was one of the better-performing sectors. So overall I think the response to Delta is driving concerns about economic growth more broadly and that is getting reflected in real estate returns.

WMRE: We’ve talked about inflation in the past and how you didn’t see it as a major point of concern. Is that still the case?

John Worth: As I look at the data I see this very much as a supply chain driven issue. The question becomes, “When are the supply chain issues going to filter through?” Our expectation is that this will take some time. When you shut down big chunks of the global economy, it’s going to take some time to restart the machine and you’re going to see hiccups and gaps in places.

Shipping containers in the wrong place. There are backups at major ports. There are issues in the semiconductor supply chain. All of those are case studies in how the smooth functioning of the global economy requires more coordination than you might think about when you’re picking up an item from a store or ordering online. You are not thinking about the supply chain dynamics.

However, whether we are going to see an inflationary cycle [with] wage/price pressures, I think that’s a relatively low risk. Nevertheless, what we’ve seen is that REITs—because they have some of the fundamental characteristics of real estate—have tended to outperform the general stock exchange during periods of inflationary pressures. Real estate leases often have CPI escalators built in and REITs structure their leases so that they have some coming due every year [and] have the ability to renegotiate a meaningful part of their portfolios annually.

The other thing unique about real estate is that it can perform well during both periods of high inflation and periods of low inflation. That’s unlike commodities or TIPS, which can perform well during high inflation, but generally perform poorly the rest of the time. So REITs offer a low cost hedge.

WMRE: We’re also at the end of the third quarter. Are there other themes to look back at or things to look forward to for the final quarter?

John Worth: We’re up to $54 billion in M&A deals pending or completed, year-to-date. About $38 billion of that is attributed to REIT-to-REIT transactions.

WMRE: Can you talk a bit about the new Morningstar research on portfolio construction?

John Worth: The research used portfolio optimization techniques and concluded that REITs should make up between 4 percent and 13 percent of an investor’s portfolio. That’s very consistent with our view and is aligned with a wide body of literature supporting an allocation to REITs and real estate in the five percent to 15 percent range. And although we’ve seen this before, it’s important to see it from yet another researcher.

In general, we want to make sure financial advisors understand how to use REITs. REITs are a diversifier and an income-based total returns driver. When you look at the broad-based investment market basket, you find that 15 percent of that is allocated to commercial real estate. So it stands to reason that you would find a well-diversified portfolio [somewhat] similar to that market weight.

The role of advisors and a number of us in the industry is to describe how you can get to that allocation in an efficient way. A piece so many investors and advisors misunderstand is what constitutes commercial real estate. There’s a perception that it’s predominantly retail and office. But if you look at the REIT index, retail and office are each only about 10 percent of the index. The diversity of commercial real estate is something that individual investors sometimes don’t understand.

Source: “Amid Broader Selloff, Publicly-Traded REITs Took a Hit in September“

October 2021 CCIM Deal Making Session Properties

October 6, 2021 by CARNM

Thank you to all of the brokers, sponsors, and guests who attended the October 2021 CCIM NM Deal Making Session and to those who shared their properties.

Click here to view source PDF.

Click here to view the Thank Yous.

	Name	Property, City	Type	Price
1.	Tai Bixby	500 Market St. Santa Fe, NM 87501	Retail	$17,500,000
2.	Randy McMillan, CCIM, SIOR David Ikard	945 Anthony Dr. Anthony, NM 88021	Office	$3,745,304
3.	John Algermissen Genieve Posen	4010 Central Ave Albuquerque, NM 87108	Retail	$899,000
4.	Frank Yu	NWC Idalia Rd & Highway 528 Rio Rancho, NM 87144	Land	$1,070,269
5.	Isaac Romero	1700 Central Ave Albuquerque, NM 87106	Retail	$1,260,000

Lumber Prices Start to Rise Toward What Might Be a New Normal

October 4, 2021 by CARNM

Building commodities prices are inflated from increased demand and ongoing supply chain issues.

Mid-September: it was a good time for lumber prices, while it lasted. After levels earlier this year hitting $1670.50 per thousand board feet—high enough to choke the oxygen out of many building plans—they finally started to drop and hit $454.40 on September 15 on the spot market.

But on the same day, the futures market was $595.90. In this case, foresight was 20-20. The spot market started Friday, October 1 at $625 while futures were at $627.50. A draw—and maybe for the next year close to the new normal according to Bryan Shaffer, principal and managing director at George Smith Partners.

“I think the $500 to $600 range is going to be more the new normal for at least the next 12 months,” Shaffer tells GlobeSt.com. “Nothing’s normalized yet. And you have the inflation and labor issues cropping into pricing of everything. It’s very hard to get labor today so it’s made it harder for all the producers to get goods out.”

Another issue has been the generally disrupted supply chains for raw materials and finished goods as well as greater demand from builders, much of which is projects that had been put on hold earlier this year. In short, increase demand without matching higher supply and prices will inevitably rise.

Then there are all the other affected commodities. Copper isn’t at the $4.60 to just over $4.70 of mid-March, but still far above the $2.60 in early October 2019. Gypsum building materials are at an all time high, at least since 1994.

“For real estate, it’s not the copper prices so much as the plumbing materials, they’re all still inflated,” Shaffer says. “The raw materials were hard to come by and [producers] weren’t finishing them. People need all these materials to make their products and are waiting now. They’ve had to lay people off or stop production.”

“All those things are going to lag coming back,” Shaffer adds. “The suppliers are going to wait. They have the excuse for a higher price and until the market pushes back, they’re going to keep doing that.”

Plus, macroeconomic conditions don’t help. “Part of it is people view the dollar as getting a little bit weaker,” says Shaffer. “We’re going to add more debt, take on more projects on the federal side. It makes oil spike up; all commodities spike up. Steel’s also been spiking up. There have been issues in China trying to regulate environmental controls and they’re pressuring steel manufacturers to reduce their output.”

In other words, while developers and builders likely won’t get walloped with the stratospheric pricing of earlier this year, getting buildings finished is going to cost more than it used to.

Source: “Lumber Prices Start to Rise Toward What Might Be a New Normal“