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Archives for March 2022

CRE Investments – The Insider’s Perspective

March 28, 2022 by Marcus & Millichap Research Services

Investor Perspectives on the Value of Commercial Real Estate

Investors See Opportunities in Pandemic-Impacted Sectors

  • Despite uncertainty around return-to-office, Office absorption has been positive & rising for 3 quarters
  • Investors expect 2.4% Y-O-Y Office price appreciation
  • Loosening COVID mandates & strong growth trajectory has investors projecting 3.7% rise in Retail values

Underlying Trends Will Continue to Drive CRE Appreciation

  • Housing shortage has 43% of Apartment investors saying it’s a good time to buy; Anticipate 8.6% price climb
  • While 40% of all investors think it’s time to buy Industrial, 58% of owners think the same; Expect 7.4% value rise
  • Supply shortages to sustain warehouse demand

Insiders’ Insights Provide Unique CRE Opportunities

  • Certain Hotel types performing near pre-COVID levels, creates expectation of 7.3% value gain over the next year
  • Record-low vacancies & subdued construction pipeline has Self-Storage investors forecasting 6.4% value gain
  • Consolidation trends and strong demographics create expectation of 9% value gain for Seniors Housing

*As of 1H 2022
Base: All respondents; bases vary by property type currently invested in.
Sources: Marcus & Millichap Research Services, M&M/WMRE Investor Survey

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Filed Under: Research Brief, Investor Sentiment Survey

Senior Housing and Skilled Nursing – Special Report

March 24, 2022 by Marcus & Millichap Research Services

Pent-Up Need for Critical Services Drives Record Absorption; Labor Shortage and Inflated Operating Costs Curb Sentiment

  • Two-thirds of relinquished units refilled in the second half of 2021. Across the final six months of last year, more than 30,000 seniors housing units were absorbed, according to NIC Map® Data Service. This was a very impressive rebound after roughly 44,000 units were relinquished on a net basis during the four quarters following the onset of the pandemic.
  • Rates are climbing, but not as fast as inflation and expenses. For most levels of care, average monthly rents grew at a pace on par or faster than the 2015-2019 yearly average. Although, much of the growth came from stabilized properties aggressively pushing up rates, while discounting became increasingly common in facilities with occupancy well below pre-pandemic metrics.
  • Labor shortage inhibits occupancy and lifts operating costs. While the headwinds directly related to COVID-19 have eased, the lingering labor deficit in the industry continues to plague operations. The American Health Care Association/ National Center for Assisted Living reported that over 95 percent of nursing homes and assisted living communities were dealing with staff shortages last year.
  • Competition for stabilized assets steers buyers to upside prospects. After most institutions hit pause in the early stages of the health crisis, many came off the sidelines as more stabilized properties entered the market.

 

Unbalanced Seniors Housing Recovery Transpires

  • Levels of care that require more staff face steeper hurdles. Many assisted living and memory care communities are facing headwinds recruiting and retaining staff, slowing the pace of occupancy recovery. Ending last year, both segments recorded sub-79 percent occupancy on a national level.
  • Dense coastal areas trail in the recovery. Seniors housing was put in a negative spotlight early in the pandemic amid virus outbreaks at facilities, particularly in the Northeast and Pacific regions.
  • Low construction alleviates other sector challenges. Across seniors housing last year, inventory growth totaled just 3.4 percent — the slowest expansion since 2014. The sluggish pace of development will extend into 2022 amid high material costs and supply chain bottlenecks.

Skilled Nursing Slowly Moving in the Right Direction

Occupancy climbs in three straight quarters, but a lot of ground to make up. As skilled nursing facilities are particularly labor intensive, many facilities are struggling to maintain sufficient staffing in the current environment. This is limiting admissions, and therefore, occupancy gains. Nonetheless, the recovery is underway, as the segment recorded positive absorption of at least 4,500 units in each of the past three quarters, bringing occupancy to 77.1 percent entering 2022. Still, this is 900 basis points behind the 2019 measure. Meanwhile, average daily rates continued to steadily elevate, with the fastest climbs in the Mid-Atlantic and Pacific regions.

Sources: NIC Map® Data and Analysis Service (www.nicmap.org)

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Sales data includes transactions sold for $1 million or greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice.

Sources: Marcus & Millichap Research Services; NIC Map® Data and Analysis Service (www.nicmap.org); U.S. Census Bureau; Moody’s Analytics; Real Capital Analytics

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Filed Under: Special Report

2022 U.S. Industrial Investment Forecast Report

March 24, 2022 by Marcus & Millichap Research Services

National Industrial Overview

  • The health crisis had a major impact on industrial tenants. The requirement to social distance led to a surge in e-commerce sales, necessitating expanded operations for greater direct-to-consumer deliveries. Intermittent closures of production facilities and ports has also fostered extreme backlogs in the global supply chain. Long lines of cargo vessels waiting to be unloaded has put pressure on major ports to expand, as well as distributors and retailers to augment their warehousing space. Some shipping has been diverted to smaller ports, boosting space demand.
  • The surge in demand is producing historically strong property performance metrics. A record 520 million square feet was absorbed on a net basis in 2021, as vacancy fell to a multidecade low. A robust appetite for space will push vacancy even lower this year, despite the largest construction pipeline since at least 2000. Approximately 420 million square feet of industrial space will be delivered this year, with developers focusing on larger properties. Buildings under 100,000 square feet in size comprise only a small amount of arriving space. The difficulty in developing smaller facilities closer to population centers, paired with the avid demand for such projects, will continue to apply upward pressure on rents.

Industrial Investment Outlook

  • Investors have taken note of the sector’s benchmark-setting performance fundamentals, leading to an all-time high number of industrial assets changing hands last year. Institutional buyers with experience in other commercial properties are now entering the industrial landscape, as part of diversification strategies.
  • The considerable demand for properties has driven the average sale price in the United States up by over 35 percent since 2019 to $133 per square foot entering this year. As prices climbed, cap rates have compressed. The mean yield across the country was in the mid-6 percent range as 2021 came to a close, with top-tier assets in the most sought-after locations changing hands with initial returns under 4 percent.
  • Ongoing, elevated inflation is applying upward pressure to interest rates. The rising costs of capital are narrowing transaction margins, which may prompt owner-users to make new arrangements. More companies may opt to enter into a sale-leaseback now, locking in a long-term lease at more favorable terms than where lending rates are currently trending.

Modern Consumption Trends Underpin Industrial Facilities as an Increasingly Essential Property Type

  • Pandemic-accelerated distribution and warehouse needs still growing. The health crisis had a major impact on industrial tenants. The requirement to social distance led to a surge in e-commerce sales relative to in-store shopping, necessitating expanded operations for greater direct-to-consumer deliveries. Demand increased for both large distribution centers that could serve whole regions, as well as smaller infill locations closer to where consumers live to facilitate rapid delivery.
  • Record development not able to exceed hearty tenant demand. The shift in industrial space needs, propagated by COVID-19, has had a profound impact on property fundamentals. A record 520 million square feet was absorbed on a net basis in 2021, fostering an equally noteworthy level of rent growth as vacancy fell to a multidecade low. A robust appetite for space will push vacancy even lower this year, despite the largest construction pipeline since at least 2000.

2022 National Industrial Outlook

  • Mismatch between production and transport capacity continues. Production output, at least within the United States, has returned to levels recorded before the health crisis; the amount of tonnage being transported by truck, however, continues to lag. A shortage of drivers is constraining the ability to transport goods across the country. If this dynamic persists, it may solidify businesses’ plans to shore up inventories.
  • Airports gain even more logistical prominence. An expectation of rapid delivery, established pre-pandemic, has collided with prodigious backlogs at major cargo terminals. In order to transport some goods more quickly, companies have turned to airfreight. The volume of cargo transported by air has increased throughout the health crisis, underscoring demand for distribution and warehouse space at inland airport hubs.
  • Advanced manufacturing driving new space needs. The recent supply chain disruptions may prompt more firms to bring their production processes closer to home in the years to come. Advanced manufacturing is already making a prominent return to the U.S. in the form of new semiconductor plants situated across the country, as well as electric vehicle production. The numerous support businesses will fill space nearby.

Sources: Marcus & Millichap Research Services; American Council of Life Insurers; Blue Chip Economic Indicators; Bureau of Economic Analysis; Commercial Mortgage Alert; CoStar Group, Inc.; Irving Levin Associates; Moody’s Analytics; Federal Reserve; Foresight Analytics; Mortgage Bankers Association; Real Capital Analytics; RealNet; Standard & Poor’s; PNC Healthcare; The Conference Board; Trepp; TWR/Dodge Pipeline; U.S. Bureau of Labor Statistics; U.S. Census Bureau; U.S. Department of Health and Human Services; USGS; U.S. Securities and Exchange Commission; U.S. Treasury Department.

© Marcus & Millichap 2022

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Filed Under: Research Brief

What the Fed Rate Hike Means for CRE Investors

March 21, 2022 by Marcus & Millichap Research Services

What the Latest Fed Meeting Means for CRE Investors

Investor Sentiment on the Rise in Latest Investor Survey

  • Investor sentiment has fully recovered from the pandemic and reached its highest level since 2015
  • Suggests elevated CRE transaction activity in 2022
  • Inflation and rising interest rates are top investor concerns

Federal Reserve Takes Steps to Combat Elevated Inflation

  • The Fed increased overnight interest rates 25 bps at meeting last week; Could raise rates 6 more times in 2022
  • Fed will end Quantitative Easing this month after doubling balance sheet; Could shift to Quantitative Tightening
  • These efforts are meant to create a rising interest rate climate, meaning cost of capital is expected to rise

Dramatic Interest Rate Rise Could Deter CRE Buyers

  • A rate rise of 50 and 100 bps could result in 6% and 19% of respondents reducing their acquisitions, respectively
  • The expected Fed increase of 175 bps could slow activity for half of buyers over the course of the year
  • Buying now will help lock in favorable rates; Selling now will ensure the largest buyer pool to choose from

*As of 1H 2022
Sources: Marcus & Millichap Research Services, M&M/WMRE Investor Survey

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Filed Under: Research Brief

Ukraine Invasion Implications for CRE – Special Report

March 14, 2022 by Marcus & Millichap Research Services

Ukraine Crisis to Reverberate Across Global Economy U.S. Real Estate Positioned to Withstand Impacts

The humanitarian, social and political crisis unfolding in Ukraine has begun to deliver some economic fallout in both global and United States markets. Oil prices have surged, the stock market moved into correction territory and a flight-to-safety pushed interest rates lower. As the war plays out over the coming days, weeks or perhaps months, a wide range of economic consequences could emerge. Setting aside worst-case scenarios, the war in Ukraine likely holds little direct risk to U.S. commercial real estate. Although some ripples will likely be felt by investors, hard assets have historically demonstrated durable results in times of turbulence and uncertainty.

Inflation Risks Intensify as Oil Prices Surge

  • War having clear and immediate impact on energy costs. Russia is one of the world’s top oil producers, delivering about 12 percent of the global supply, and oil is the country’s most valuable export. The financial sanctions already placed on Russia in the wake of their invasion of Ukraine, together with the U.S. oil boycott and rising global public pressure to shun Russian products, will weigh on the country’s ability to export oil. This is placing new strains on global oil supplies, sparking a surge in energy prices. Oil prices were already on the rise, prior to the invasion.
  • Increasing fuel production comes with host of hurdles. If oil shortages amplify, international strategic reserves will be tapped to cover the short-term needs. Over the longer term, U.S. energy companies could ramp up production by an estimated 600,000 barrels per day, on top of the 11-12 million barrels the U.S. currently produces.

Interest Rates Face Complex Outlook Amid Monetary and Financial Cross-Currents

  • Fed’s balancing act just became more complicated. The Federal Reserve faces a new set of challenges in its battle with inflation, as the war in Ukraine introduces a range of new variables. The stock market correction, with an ensuing flight-to-safety, placed downward pressure on long-term interest rates, while expectations of Fed rate hikes have applied upward pressure on short-term rates.
  • Consumer sentiment key to stagflation risk. Prior to Russia’s invasion of Ukraine, the prospects of stagflation — where inflation is high but real economic growth stalls — were nominal. Despite this, the added pressure created by rising fuel prices and a potential yield curve inversion, in conjunction with the ongoing labor shortage and supply chain problems, could dampen economic growth.
  • Multiple policy tools still on the table for the central bank. The Federal Reserve has reiterated its commitment to raising the overnight rate by 25 basis points on March 15, but plans beyond that are likely fluid, as Fed leaders closely monitor market conditions. Raising interest rates is the most prominent tool available in the Federal Reserve’s efforts to rein in inflation, but it tends to be a slow process.
  • Current conditions partially tighten capital liquidity. In light of added uncertainty, lenders have begun to assume a more cautious stance. Some financiers have begun to reopen their spreads and tighten their leverage requirements. Thus far, the movement has not been significant or broad-based, but if the war in Ukraine escalates, either militarily or through cyberattacks, lenders may adopt a more conservative posture.

*As of March 9
Source: Federal Reserve

Inflation Resistance and Stability Underpin Real Estate Advantage

  • Macroeconomic factors highlight real estate attributes. The increasingly complex geopolitical, economic, financial market and inflation landscapes have aligned to reinforce the investment advantages of commercial real estate. Many of the factors weighing on the economic outlook and driving inflation, such as material, equipment and labor shortages, will restrain commercial real estate construction. This will help keep vacancy rates low and boost the commercial real estate revenue outlook.
  • Real estate stability increasingly valued by investors. Even the most seasoned political and military experts cannot predict how long the Ukraine crisis will last or what the ultimate outcome will be, but the economic and financial market ripples have already become readily apparent. Within this context, the combination of yield, stability and inflation resistance of real estate will become increasingly valued by investors, supporting transactional activity in the sector. Even after hostilities in Ukraine end, the impact of the war will resonate. Any potential rebuilding of Ukraine could spur global economic growth.

Key Demand Drivers Supporting the Commercial Real Estate Outlook

  • While the U.S. economy certainly faces headwinds, and the war in Ukraine has increased the risk of a recession, core underlying drivers continue to support commercial real estate space demand. Positive demographics remain a key factor supporting the housing market, as millennials age into the prime rental cohort.
  • The wind-down of mask mandates across the U.S. will be another factor supporting commercial real estate demand, particularly in office and retail space. Many companies have reinitiated plans to return to the office, while consumers are once again venturing into retail stores, restaurants and entertainment venues. Hotels will also be a beneficiary of the changing mask rules, particularly if businesses capitalize on this change to reinitiate business travel.
  • Self-storage demand outpaced expectations through the pandemic, and the construction pipeline for these properties has declined over the last two years, allowing the sector to achieve record-low vacancy rates. The proven recession resistance of self-storage will remain a top feature, attracting capital seeking diversification.
  • Supply chain disruptions reiterated the need for businesses to maintain sufficient local inventory to cover logistics lapses, bolstering industrial space demand. The sector has also benefited from increased use of e-commerce platforms that leverage industrial space as an integral component of the sales fulfillment process.

Mitigating Downside Risks

Commercial real estate offers long-term durability. The war in Ukraine will remain fluid, and even after the invasion ends, there will likely be considerable geopolitical instability across the region. Allegations of war crimes, potential radiation hazards, the displacement of millions of people and the destruction of entire cities will impact the global economy and political landscape long after the shooting stops. While there are some upside scenarios, downside risks are far more numerous and broad reaching.

*Forecast
Sources: BLS; New York Times

Price: $1,000

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guaranty, express or implied, may be made as to the accuracy or reliability of the information contained herein. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice.

Sources: Marcus & Millichap Research Services; Federal Reserve; CoStar Group, Inc.; Moody’s Analytics; MNet; NICMap; Real Capital Analytics; RealPage, Inc.; Yardi Matrix; Radius+; U.S. Census Bureau; U.S. Bureau of Labor Statistics; U.S. Energy Information Administration

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Filed Under: Special Report

What the Russian Oil Ban Means for Real Estate

March 14, 2022 by Marcus & Millichap Research Services

Will the Russian Oil Ban Spillover to the U.S. Economy?

Boycott of Russian Oil to Further Raise Energy Costs

  • U.S. announced unilateral boycott of Russian oil, which makes up less than 10% of U.S. oil imports
  • Plans to cover oil shortfall will take time to realize; temporary solutions unlikely to keep oil price low
  • Impact already being felt with elevated gas prices, expected to boost inflation by 1%-2% this year

Greater Inflation Increases Economic Risks

  • Higher inflation puts upward pressure on interest rates; likely to slow economic growth in 2022 and 2023
  • Economists still forecast 2022 economic growth greater than 3%; concerns for potential recession growing

How Can CRE Investors Prepare for Turbulence/Uncertainty?

  • Positioning into MOB or Apartments can capitalize on demographic trends to ride out possible recession
  • Self-Storage performed well through last two recessions and benefitted from pandemic-induced lifestyle changes
  • STNL Retail good defensive asset with cap rates running in 5%-7% range; Industrial remains strong in current cycle

*As of March 07
Sources: Marcus & Millichap Research Services, Energy Information Administration

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Filed Under: Research Brief

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This information has been secured from sources we believe to be reliable, but we make no representations or warranties, expressed or implied, as to the accuracy of the information. References to square footage or age are approximate. Buyer must verify the information and bears all risk for any inaccuracies. Any projections, opinions, assumptions or estimates used herein are for example purposes only and do not represent the current or future performance of the property. Marcus & Millichap Real Estate Investment Services is a service mark of Marcus & Millichap Real Estate Investment Services, Inc. © 2020 Marcus & Millichap and Limon Net Lease Group

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