Archives for August 2023

A new report from real estate data firm MSCI Real Assets, “How Big Is the Global Real Estate Market?”  looks at how the global professionally-managed real estate market changed over the course of 2022. As could be expected, rising interest rates, a strengthening U.S. dollar and a more uncertain economic environment combined to present some new challenges for the global commercial real estate investment universe. Nevertheless, some of the markets MSCI looked at continued to see growth even under these conditions. Here are some takeaways from the report:

1. The size of global professionally-managed commercial real estate market declined by 4.1% between 2021 and 2022, to $13.3 trillion.
2. During the same period, the size of the real estate market in the Americas grew by 0.6%, to $5.9 trillion, while the size of the market in Europe, Middle East and Africa (EMEA) shrank by 9.8% to $4.1 trillion and the Asia Pacific (APAC) market shrank by 4.6% to $3.4 trillion. A significant part of that dynamic was driven by the strength of the U.S. dollar compared to other currencies, which hit particularly hard in Sweden, Norway, the U.K. and Japan.
3. Currently, Americas accounts for the largest share of the professionally-managed global commercial real estate market, or 43.9%, followed by EMEA at 30.4% and APAC at 25.7%.
4. The U.S. topped the list of the largest real estate markets in the world, at roughly $5.3 trillion or 40.3% of the global professionally-managed real estate universe, though it saw growth of only $90 billion in 2022, several times lower than in 2021. It was one of only five markets in MSCI’s tally that showed any growth during the year. The others were Australia, with $9 billion, South Korea, with $20 billion, Ireland, with $4 billion, and Slovakia, with $1 billion.
5. In contrast, the U.K. real estate market saw a drop of $132 billion in value during the year, and Japan’s real estate market lost $96 billion in value. Both countries rank in the top four professionally-managed real estate markets globally.
6. Drilling down further to look at real estate ownership structures in each region, MSCI found that in the Americas private (unlisted) real estate portfolios accounted for the largest portion of the market, at 39.8%, followed by listed portfolios at 32.8%, directly owned assets at 12.9% and 14.5% attributed to “other and unknown” types of holdings. The breakdown was somewhat similar in the EMEA, but differed significantly in the APAC region, where listed portfolios accounted for more than half of the market at 54.3%, while unlisted portfolios accounted for just 23.0%.
7. The firm also looked at how transparency, as measured by JLL’s Global Real Estate Transparency Index, correlated with the weight of a country’s real estate market in the global system. It found that countries high in the transparency rankings—the U.S., the U.K, France, Australia and Canada, for example, among those at the top—also had some of the highest weighted markets for professionally-managed real estate.
8. MSCI found that, globally, commercial real estate acquisitions fell by 20% year-over-year in 2022. When the firm’s researchers compared the decline in transaction volume to market size, they found that globally the resulting ratio reached 8.7% vs. 10.0% in 2021. By country, the ratio was the highest in Slovakia, at 19.6%, South Korea, at 14.9%, Ireland, at 13.5%, and Poland, at 13.0%. In the U.S., it was 11.7%. According to a note from Rene Veerman, head of real assets with MSCI, while widespread declines in transaction activity have impacted valuations in a number of markets, that effect has not been uniform. “The U.K. led the price adjustment, followed by continental Europe, but the U.S. and Asia Pacific, particularly, have lagged. And only now 12 months after the first signs of a correction in transactional activity are we seeing the first signs of valuation modifications in Asia Pacific,” he wrote.

MSCI analyzed a total of 37 markets for the report. All of its comparisons to estimates of market size in previous years were based on a history-adjusted basis.

Source: “A Look at the Size of the Global Commercial Real Estate Market“

Looking for an industrial site with lots of truck parking? You could be in luck if real estate assets owned by the trucking company Yellow come on the market. The company filed for Chapter 11 bankruptcy on Aug. 6, and the shutdown is expected to put hundreds of industrial properties up for sale or lease, according to CoStar Group’s August 2023 real estate data update.

Even though most of Yellow’s properties were built before 1985, “one key advantage is that they offer abundant truck parking, which is in short supply in major U.S. markets,” CoStar noted. With truck terminals in most major U.S. cities, Yellow or its subsidiaries have “at least seven facilities” in each of New York, Chicago, and Los Angeles.

In total, CoStar tracks more than nine million SF of industrial space that is either owned or leased by Yellow or its subsidiaries in more than 240 U.S. cities. Yellow’s 2022 annual report refers to more than 300 properties across North America.

While Yellow’s bankruptcy may increase the supply of industrial space, Amazon may be ready to do the opposite. Each month from May through July, Amazon put 600,000 SF of warehouse space up for lease, CoStar noted. However, CoStar believes Amazon’s strong second quarter earnings report suggests that strategy could change.

“The company may be returning to a more offensive strategy when it comes to growing its distribution space,” CoStar commented. It cited the second quarter’s 9% boost to Amazon’s net sales from online stores and third-party seller services compared to 2Q 2022, as well as Amazon’s plans to double the number of same-day delivery facilities it operates.

Source: “Industrial Market May Be Flooded with Yellow-Owned Properties“

The median U.S. asking rent in July is only $16 below the record high set in August 2022, according to Redfin, with the average rent being $2,038.  It noted that while rent gains cooled over the past year “big bargains are still often hard to come by given rents are near record highs.”

It is yet another metric to help guide apartment owners as they try to forecast where rents are headed. While rents are clearly normalizing, landlords rely on a myriad of numbers, statistic providers and theories as they set their own strategies. To cite just one: Data analytics firm Markerr’s outlook in July for the next five years was that the top 100 US markets will see a 3.9% increase in rent through 2024, and a 5% jump the year after, followed by more normal 3% to 1.5% growth in years three to five.

GlobeSt.com spoke with several experts to see how they gauge the market’s direction.

Greg Bates, CEO of GID, a real estate owner and fiduciary, tells GlobeSt.com that rent growth, in the aggregate, tends to follow income levels that rise and fall with the state of the economy.

“This cycle, rents rose sharply following historically strong wage growth,” Bates said. “Rent levels have also risen based on an influx of high-income households choosing to rent: the number of renter households earning over $100,000 has nearly tripled since 2010.

“This has allowed rents to increase faster than income growth alone would suggest without eroding affordability for the middle and upper tiers of the rental market. In contrast, the affordable segment of the US rental market remains underserved, and increasing attainable housing remains a primary focus for the industry.”

Bates said that while rent growth can be volatile in the short term, over the long term it is well governed by market forces.

“The data shows that rent spikes are usually short-lived and offset by rent decreases as supply increases and the economy cools,” he said.

“Over the past 20 years, national apartment rents have increased by an average annual pace of less than 3%, in step with income gains during the same time, suggesting the market is efficient and reaches equilibrium through natural forces. We expect rents, along with incomes, to moderate and track inflation going forward.”

Adam Levin, Executive Managing Director of Levin Johnston, tells GlobeSt.com that while the pace of national rent growth has eased, rent levels are still surpassing historical averages and the outlook for rent growth should remain relatively steady for the rest of 2023.

“As supply chain constraints and high cost of labor continue to slow construction, demand for rental properties is exceeding the available supply, leading to strong fundamentals in stabilized markets.”

California’s Bay Area, particularly Silicon Valley, is experiencing near-record-high apartment rents due to strong fundamentals, low vacancy rates, and sustained demand despite economic challenges, Levin said, adding that Silicon Valley maintains the Bay Area’s lowest apartment vacancy rate at 4.4% in Q2 and San Jose stands out as the only major US market where the average effective rent surpasses $3,000 per month.

Neil Schimmel, Investors Management Group Founder & CEO, tells GlobeSt.com, “Seeing a 0.3% rent growth year-over-year might not seem like a seismic leap, but it’s a window into some important dynamics at play.

“Nationwide rent growth data gives us a panoramic view of the economic pulse and shifts in supply and demand. But where it gets interesting is at the micro level.”

Schimmel said that as buyers, his analysis doesn’t stop at a national or regional average.

“We dive into single markets and neighborhoods. We’re boots-on-the-ground in the neighborhoods we’re shopping, getting real-time data down to the individual property level.

“We’re looking at the granular data, such as what operators are getting on new leases as compared to renewals. There, the story can change quite a bit from a national data set. We continue to make sense of these patterns and leverage them to make smart choices for our properties and portfolio.”

Jonathan Miller, a member of The Counselors of Real Estate and President and CEO of Miller Samuel in New York City, tells GlobeSt.com that even as mortgage rate growth slows, the upward pressure on rental prices remains as “very low unemployment and high wages are the perfect cocktail for higher rents.

“However, there are some signs that rental price growth may be nearing peak levels. In Manhattan, one of the highest-cost rental markets in the nation, leasing volume has begun to slide as consumers have likely entered an affordability threshold and can’t continue paying higher rents.”

Javier Lattanzio, Director of Sales and Rentals at Time Equities, tells GlobeSt.com, “It’s a perfect storm. The current rise in apartment rents is a result of the lack of inventory. Homebuyers are experiencing high interest rates, which the result makes them more apprehensive to purchase a home. It’s caused rents to increase upwards of 10%, and it’s still increasing. We are at the highest of the market on the rental side.

Source: “Experts Forecast Where Apartment Rents are Headed“

It’s been eight years since world leaders came together in Paris and pledged to reduce emissions to net zero by 2050. Eight years of being told to ditch plastic, ditch meat, and ditch cars. Eight years of billion-dollar investments into measures that are at best distractions, at worst self-sabotage.

I’m talking about the capital flowing into meatless burgers and alternative milks, paper straws and e-scooters, all presented as urgent efforts to tackle climate change.

Yet for eight years, temperatures have continued to hit record highs.

This summer in Europe, as with last summer, extreme weather has caused wildfires that have destroyed homes, businesses and communities. In the last 12 months, catastrophic flooding has hit Pakistan and Canada. Focusing on the wrong targets – like making an all vegetarian population – will not help, certainly not in time. We need to reprioritise and tackle sectors that have a much bigger impact.

The built world in which we live, work, shop and create is the world’s most carbon-emitting sector and in urgent need of transformation. Right now, this is where we should be putting our energy and capital, if we are to make any difference at all.

Real estate is the world’s largest industry ($330tn). It’s also the least digitised and most polluting asset class. As much as 8 per cent of global green house emissions come from concrete alone. A third of solid waste in Europe and North America comes from the construction and demolition of our buildings and the built world industry as a whole is responsible for 40 per cent of global energy-related carbon emissions.

The numbers are staggering.

If left unchecked, these emissions are set to double by 2050, as our economies build more to accommodate growing populations and rapid global urbanisation.

The built world problems are only exacerbated by current economic challenges – rising interest rates and rampant inflation. Meanwhile, working from home has fundamentally changed cities like London, where offices have 14 per cent vacancy rates.

There is a particular advantage in Europe, where more than $4.5bn has been invested into green construction tech between 2017 and 2022. More than half of these deals were in Europe. European regulations in renewable energy, building standards and sustainability are world-leading. The research taking place at European universities can establish a climate tech industry that serves the whole world.

Climate tech has also managed to buck wider economic trends. It attracted a record $65bn of VC funding globally last year, and will need to transform traditional industries that currently account for 20 per cent of global GDP. Transforming industries such as steel and cement will be pivotal.

Innovations are being seen across the entire lifecycle of the built world, from tackling the supply chain to new materials and construction techniques, to building operations and management. In every aspect of the built world there is an opportunity to decarbonise, as well as increase efficiency.

We also need to realise sooner rather than later that we do not have the luxury of time. A deadline like 2050 is still flung too far into the future, it creates political complacency and the sense we can wait to implement real change.

Investors are at the front line of this, and can direct capital into the industries which can effect change. Time is running out and without focus we will leave it too late.

Source: “Commercial Real Estate Has An Emissions Problem“