How is CRE Performing two Years into the Pandemic?

Economic Landscape Looks Significantly Different

• During pandemic onset, millions of jobs were lost, businesses shuttered and uncertainty was widespread
• Today, inflation remains a concern, but most economic metrics are near or above their pre-pandemic levels

Behavior Changes Benefited Some CRE

• Greater eCommerce adoption and increase in store inventories pushed Industrial vacancy to a record low
• After initial softening, rise in household formation is driving Apartment space demand
• Self-Storage benefited from disruptions to school and work life and changes in living arrangements
• Necessity Retail thrived during the pandemic while other types, like experiential retailers, are now recovering

Momentum Shifting for Impacted Property Types

• Hotels suffered a strong initial impact, but rising business and leisure travel could boost summer occupancies
• Seniors Housing faces lengthy recovery as industry adapts to the new operating climate
• Office outlook uncertain, should benefit from relaxing restrictions and continued job growth

*Self-Storage includes 1Q data for 2019 and 2020
MT = Multi-tenant: ST = Single-tenant
Sources: Marcus & Millichap Research Services, RealPage, Inc., CoStar Group, Inc., Radius+

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How Supply Chain Disruptions Could Transform CRE

Supply Chains Disturbances Have Far Reaching Impact

• Supply chain disruptions greatly increased shipping times and costs, impacting availability of materials
• Cuts into manufacturing outputs, construction and retail inventories
• Also raises costs of goods, further fueling inflation

Companies Taking Steps to Limit Impact of Disruptions

• Increasing order quantities and storing excess products in local warehouses provide small, short-term buffers
• Some manufacturers are reshoring, looking at facilities in the U.S., Mexico or Canada
• Higher costs of manufacturing locally offset by increasing automation and lower transport costs

The Ripple Effect on Commercial Real Estate

• Industrial facilities along U.S. ports of entry, like San Diego and San Antonio, have recorded record space demand
• Shorter and more secure supply chains benefit Retail, support local job creation and boost housing demand
• Investors should consider how these changes will shape markets, and capitalize with strategic investments

*Transit time for end-to-end ocean freight from China to the U.S.
Sources: Marcus & Millichap Research Services, Freightos

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Will Rising Interest Rates Put Upward Pressure on Cap Rates?

Interest Rates and Cap Rates Not Directly Correlated

• Some investors think sellers must raise cap rates when interest rates increase in order to draw in enough buyers
• This has not held up historically, spread between interest and cap rates have varied significantly
• Yields can vary greatly by property type and market

Many Factors Currently Impacting CRE Yields

• Elevated liquidity forcing investors to compete for assets, willing to accept lower yields to invest capital
• Stock market volatility likely to drive investors to stability of CRE, putting downward pressure on cap rates
• Property types and markets with momentum or value-add opportunity draw new interest, keeping cap rates steady

Investors Need to Consider Future CRE Trends

• Demographics to reshape CRE; Retiring Baby Boomers and aging Millennials will drive certain property types
• Paying a premium now could provide opportunity for elevated returns over next few years
• Upward cap rate momentum in some markets and property types expected, unlikely to be broad-based

*Through May 11
Includes apartment, retail, office, and industrial sales $1 million and greater
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics, Federal Reserve

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What the Largest Rate Hike in 20 Years Means for CRE Investors

Fed Taking Aggressive Action to Combat Inflation

• CPI inflation reached highest level in 40 years
• Fed hiked the overnight rate by 50 bps and announced plans to shrink its balance sheet at last week’s meeting
• Goal of making money more expensive to borrow and slow spending, curtailing demand-side price pressure

Are These Decisions Too Little, Too Late?

• Many of the underlying inflation drivers, like supply chain disruptions and shortages, have not been addressed
• Elevated household cash savings could limit initial impact of Fed actions
• More rate hikes expected if inflation does not slow

CRE Investors Should Position Themselves Advantageously

• Inflation likely to persist, property types like Apartments, Self-Storage, and Hotels can help mitigate impact
• Plan for rising interest rates – Lock in longer-term debt as soon as possible
• Strong household balance sheets remain a tailwind for spending, supports outlook for various property types

*Through May 04
Sources: Marcus & Millichap Research Services, Federal Reserve

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Why CRE Buyers aren’t Moving to the Sidelines

Look Beyond the Headlines and Focus on the Facts

• Economic fundamentals are solid; 1.7M jobs were created in 1Q22, pushing unemployment down to 3.6%
• An additional $6T more cash on hand than normal is helping drive record retail sales
• Households have more cash savings than debt for the first time in 30 years, a strong positive for the economy

Investors Have Wide Range of Options Within CRE

• Investors can choose between different property types, asset classes and markets that best align with their goals
• Opportunities exist in top-tier premium assets in sought-after markets all the way to value-add in softer markets
• Depending on the composition, cap rates can range from mid-2% all the way to as high as 9%

Real Estate Investors Are Planning for the Long-Term

• Unlike with more volatile investments, CRE investors do not trade sporadically, only when circumstances change
• CRE delivers long-term cash flow and inflation resistance
• Commercial real estate is particularly suited for the current economic climate and the road ahead

*Sources: Marcus & Millichap Research Services, Federal Reserve

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