Archives for June 2023

How Investors Find Opportunities by Looking past Macro Trends

Data Drives Decision Making

• Exceptional population growth is occurring in the Sun Belt and nearby states, boosting CRE performance
• As a result, a heightened portion of CRE investment and development is targeting these areas

Macro-Trends Are Important But Not The Whole Picture

• Strong demographics boost CRE demand in the Sunbelt, but fundamentals vary from submarket to submarket
• Investors should remember to dig under the surface when making decisions even if macro data looks strong

The Best Areas In Hard-Hit Metros Record Strong Gains

• Even in San Francisco there are submarkets, like North San Mateo County, where office vacancy is more than 1,500 bps below the metro average
• Metros recording weaker positive trends will often surprise investors that look beyond market level data

*Five-year period: 2023 to 2027
Bubble size correlates to absolute population change
Forecast using Moody’s baseline scenario as of May 2023
Sources: Marcus & Millichap Research Services, U.S. Census Bureau, Moody’s Analytics​

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HOW HEIGHTENED INTEREST RATES HAVE IMPACTED CRE MARKETS​

Fed Pauses Rate Increases, Market Still In Discovery​

• The Fed chose to keep the federal funds rate flat at the June 14th meeting​
• A reprieve from rate hikes promotes stability, but markets are still adapting to higher interest rate climate​

Cost of Capital Restraining Debt Markets​

• The clearest effect of higher interest rates is a significant rise in the cost of financing on CRE deals​
• Premiums on borrowing and tighter lending standards are creating distress risk among underperforming assets​

What Will Re-Invigorate CRE Markets?​

• Interest rate stability could initiate the reconciliation of the buyer-seller expectation gap​
• The interest rate driven market disruption could create opportunities for well-positioned CRE investors

*Through June 14​
Sources: Marcus & Millichap Research Services, BLS​

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HOW POST-COVID EMPLOYMENT TRENDS ARE IMPACTING CRE DEMAND​

U.S. Labor Market Continues Strong 2023​

• The U.S. economy has added over 1.6 million jobs in 2023, the third strongest start to a year since 2000​
• Labor market gains have helped boost multifamily and retail demand​

Post-Pandemic Job Growth Not Evenly Distributed​

• 14 Major Metros Have Expanded Workforces by 5%, including cities like Austin, Dallas, Orlando, and Phoenix​
• At the same time, 9 have yet to recover to February 2020 employment levels​

Developers Most Active In High-Growth Markets​

• Supply growth in the multifamily segment is over 5% in certain high-growth markets​
• Household formation was positive in New York and Chicago since the pandemic, showing the importance of looking at the complete economic picture

*Through May​
Sources: Marcus & Millichap Research Services, BLS

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Residual Covid-19 Ripples Still A Significant Factor for CRE

Pre-COVID-19 CRE Revenue Growth Was Stable

• From 2014 to 2019 most property types recorded total average revenue growth between 20%-25%
• This period was relatively “normal” and stable

Shocks and Revivals Can Disrupt The Trend

• Despite stable long-term return growth, CRE revenues can face significant shocks like the global financial crisis
• By the same token, the shocks of 2021-2022 affected each property types in a different, unique way

What Investors Can Expect in the Near-Term

• The market remains disrupted, but likely moving back toward normalization for most property types
• Office properties still face significant uncertainty, but CRE supply and demand are slowly moving back into alignment

*Through 1Q
Sources: Marcus & Millichap Research Services, CoStar Group, RealPage

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