Limon Net Lease Group

Archives for December 2021

Retail Sales Research Report | December 2021

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Pace of Spending Eases; Retail Real Estate in Good Shape Moving into 2022

  • Retail sales continue to float well-above pre-pandemic levels. Consumers acted on holiday shopping plans earlier than normal, resulting in a more moderate improvement in retail spending last month than is typical for this time of year.
  • Traditional retailers benefit from the return of shoppers. Over the past year, spending at store-based retailers has climbed 13.5 percent as foot traffic climbed across nearly all major sectors.
  • Broader reopening highlighted in annual spending gains. As Americans leave their homes more often, some sectors have strong annual gains. Over the past year, retail sales at gasoline stations soared 52.3 percent, though some relief is materializing as the average price of a gallon of gas slipped by $0.07 to $3.31 from the beginning of November to mid-December.

Rising Prices Present Challenge

  • Inflationary pressure creates headwinds. The consumer price index increased 6.9 percent year-over-year in November, the largest change in nearly 40 years, eroding spending power for consumers.
  • Fed forced to act to contain rising prices. Among the Fed’s two mandates, maximum employment and price stability, the pace of inflation is a significant concern. As a result, the central bank will taper asset purchases faster than originally planned and start
    lifting interest rates.

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Placer.ai; U.S. Census Bureau; U.S. Energy Information Administration

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Three Bold Commercial Real Estate Predictions for 2022

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Urban Core Recovery To Gain Momentum

  • Slow, but incremental recovery of the urban core; will vary by city’s regulations and pace of return to office
  • Driven by benefits of in-person interactions, return to office will play key role in urban revival
  • Downtown real estate, particularly Office, would benefit

Housing Construction Will Remain Short of Demand

  • Rising construction costs, ongoing labor shortage, and strong housing demand to prolong housing shortage
  • Construction likely concentrated at upper price points and in suburbs, benefiting suburban real estate
  • Higher home prices set to boost Apartment demand

Inflation Likely to Remain Elevated – Fed Walking Tightrope

  • Supply chain disruptions, wage pressure from tight labor market and housing shortages will sustain high inflation
  • Will place more pressure on Fed to further accelerate retreat from bond-buying program and raise interest rates
  • With cap rates expected to fall, the yield spread between interest and cap rates is likely to tighten

*Through November; Core PCE through October; 10-Year Treasury through December 15
Sources: Marcus & Millichap Research Services, Federal Reserve, BEA, BLS

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Is Commercial Real Estate Too Expensive

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CRE Price Growth Has Been Strong Over Past Year

  • For Apartments, Phoenix led price growth, up 35% YOY, followed by Memphis, +31%, and San Antonio, +23%
  • Tampa, +20%, and Philadelphia, +18%, led Retail growth; For Industrial, Phoenix was up 30% and Atlanta 25%
  • Atlanta’s 32% Office price appreciation was double the next largest gain of 16% in Palm Beach County, FL

Past Price Prices Does Not Dictate Future Value

  • Investors should not rely on prior appreciation as a signal of what future prices will do
  • Consider instead current price, loan rates and terms, current and future cash flow, and future values

Performance Metrics Keeping Up With Price Gains

  • The outsized price gains have been paired with similar increases in rents and declines in vacancy
  • Strong underlying demand drivers can maintain strong price appreciation, regardless of prior growth

As of 3Q 2021
Includes sales $2.5 million and greater
Sources: Marcus & Millichap Research Services, Real Capital Analytics

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Analyzing the 2021 CRE Investment Climate and the Impact for Investors

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CRE Sales Activity Surpassing Pre-Pandemic Levels

  • Through 3Q this year, CRE transactions are up 13% over same period in 2019; up 64% over same period in 2020
  • Self-Storage and Hotel transactions exceeded 2019 levels by 56% and 46%, respectively
  • Only Office is lagging below 2019 transactions, -5%, but Medical Office subsector is up by 12%

What’s Driving Record CRE Transactions?

  • Strong liquidity allows investors to resurrect delay and deferred transactions in 2020
  • Elevated inflation also drawing new investors as some property types can quickly adjust rents to offset inflation

Aggressive Sales Climate Putting Upward Pressure on Prices

  • Average CRE prices are up 12% over 2019 levels; Industrial leads with a 22% rise, followed by Apartment at +12%
  • National cap rates down about 30 bps, some markets and property types seeing record low cap rates
  • While some subsectors are still recovering, overall CRE performance in 2021 has offset the hit in 2020

Year-to-date through 3Q
Includes sales $2.5 million and greater
Sources: Marcus & Millichap Research Services, Real Capital Analytics

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Gross Domestic Product | Q4 2021

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Real Estate Resilient; Headwinds Weigh On GDP in Third Quarter

  • Economic recovery downshifts in third quarter. GDP expanded at a 2.0 percent annualized rate in the third quarter as myriad headwinds weighed on growth.
  • Key commercial sectors unfazed by the slowdown. Industrial assets remain in high demand from logistics firms, suppliers and retail back-end operations.
  • Outlook improves for challenged real estate. Although not as influential as in the second quarter, services were a net positive to GDP growth in the third period.

Short-Term Issues to Fade

  • Economy has potential to break out. While significant, the anchors on economic growth are fixable and, given time, will be sorted.
  • Labor market needs to expand. Currently, more than 10 million jobs are available across the country at a time when unemployment is below 5 percent.

*Through 3Q
Sources: Marcus & Millichap Research Services; Bureau of Economic Analysis; Bureau of Labor Statistics; U.S. Census Bureau

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Housing Research Brief | November 2021

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Homebuyers Still Endure Considerable Barriers Despite a Jump in New Inventory

  • New home listings elevate, but dynamics tell a different story. In the month of October, the number of new homes available for purchase soared to a height last witnessed in late 2008 as the market adjusted to the housing bubble.
  • Shortfall of move-in-ready homes has a ripple. As the majority of new homes on the market are still under construction or not yet started, the rise in inventory is not meeting strong demand.
  • Rising mortgage rates add another hurdle for first-time buyers. The 30-year mortgage rate exceeded 3 percent in October, which had not occurred in the previous five months.

Developing Trends

  • Building materials get more expensive after a flattening. The construction cost index jumped in the month of November, a significant change following a three-month period of stability from August through October.
  • Single-family starts taper but may rise in the coming months. Residential construction starts in the month of October declined 12 percent relative to the March peak, including an even larger drop within the single-family segment.

* Through October
Sources: Marcus & Millichap Research Services; Capital Economics; Freddie Mac; Moody’s Analytics; Mortgage Bankers Association; National Association of Home Builders; National Association of Realtors; RealPage, Inc.; U.S. Bureau of Labor Statistics; U.S. Census Bureau; Wells Fargo

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