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Archives for May 2022

How the Pandemic Impacted CRE Property Types

May 30, 2022 by Marcus & Millichap Research Services

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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Filed Under: Research Brief

How Supply Chain Issues Impact CRE Investors

May 23, 2022 by Marcus & Millichap Research Services

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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Filed Under: Research Brief

Will Cap Rates Rise Due to Increasing Interest Rates?

May 16, 2022 by Marcus & Millichap Research Services

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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Filed Under: Research Brief

What Tightening Fed Policy Means for CRE Investors?

May 9, 2022 by Marcus & Millichap Research Services

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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Filed Under: Research Brief

Are CRE Buyers Moving to the Sidelines?

May 2, 2022 by Marcus & Millichap Research Services

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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Filed Under: Research Brief

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Recent Posts

  • Implications of Federal Reserve Rate Policy
  • The Current State of CRE Transactions
  • How Consumer Sentiment Impacts CRE
  • 2023 CRE Construction Trends
  • How the Current Economic Climate Impacts CRE

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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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