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Research Brief

What the Fed Rate Hike Means for CRE Investors

June 20, 2022 by Marcus & Millichap Research Services

What the Fed’s Unexpected Rate Hike Means For CRE Investors

Fed Takes Aggressive Action to Combat Inflation

  • Fed announced 75 bps hike; previously suggested 50 bps
  • Lenders may pass a larger rate to buyers and bake-in another 75 bps increase in July
  • Four more rate hikes are expected in 2022

Housing Market Already Feeling the Impact

  • Average mortgage rates jumped up nearly 50 bps last week to 5.78%
  • Will decrease number of households that can qualify for mortgages
  • Lifts demand for already tight Apartment market; Could translate to greater rent growth pressure

Will Higher Rates Impact CRE Transactions?

  • Some buyers that are dependent on financing may tap out, but enough competition expected to remain
  • Strong rent growth could outweigh higher cost of capital for certain property types and markets

*As of June 16, 2022
Sources: Marcus & Millichap Research Services, Federal Reserve

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Filed Under: Research Brief

Are We In A Housing Market Bubble?

June 13, 2022 by Marcus & Millichap Research Services

Housing Supply Shortage Will Support Apartment Demand

Are We Facing Another Housing Bubble?

  • SF home prices up 15% YOY; Up 38% from two years ago
  • Unlike overbuilding and speculation leading up to Financial Crisis, housing has been underbuilt recently
  • Lack of housing units weighs on household formation, creating pent-up demand and driving price growth

Homeownership Becoming Increasingly Unattainable

  • Leading up to the pandemic, about half of households could afford a median priced home
  • Skyrocketing prices have made the same home affordable to roughly 26% of households
  • Rising interest rates could further shrink this number

Apartments Remain an Affordable Alternative

  • Average Apartment rent remains $638 lower than median home payment; rose at half the rate over last 2 years
  • Housing shortage and demographic trends will sustain low vacancies and rising rents
  • Investors can expect aggressive bidding for Apartment properties despite rising interest rates

*Forecast
Forecast using Moody’s June 2022 baseline forecast
SF=Single-Family, MF= Multifamily
Sources: Marcus & Millichap Research Services, U.S. Census Bureau, RealPage, Inc., Moody’s Analytics

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Filed Under: Research Brief

CRE Investment Overview and Outlook

June 6, 2022 by Marcus & Millichap Research Services

Commercial Real Estate Investment Hit Record Levels

Favorable Fundamentals Drove Record CRE Transactions

  • Elevated market liquidity, strong property outlooks and inflation resistance drew many investors to CRE properties
  • CRE transactions in 2021 exceeded prior peak by 29%; 1Q 2022 sales activity ahead of prior year
  • Placing downward pressure on cap rates

Aggressive Acquisition Climate Fueling Price Surge

  • Office, MT-Retail and Hotels, which were hard-hit but are starting to recover, saw modest price growth
  • Strong demographic trends and favorable outlooks drove strong price appreciation for Apartment and Self-Storage
  • Record transactions fueled outsized Industrial price gains

Will CRE Transactions Maintain Their Momentum?

  • Strong CRE outlook will continue to support property space demand
  • Stock market volatility may push capital to CRE, sustaining further buyer demand
  • Fast rising interest rates could erode some sales activity

*Pre-Pandemic period: 2019 through 1Q 2022; MT=Multi-Tenant
Includes sales $1 million and greater
Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.

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Filed Under: Research Brief, Outlook Report

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

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Recent Posts

  • What the Fed Rate Hike Means for CRE Investors
  • Are We In A Housing Market Bubble?
  • CRE Investment Overview and Outlook
  • How the Pandemic Impacted CRE Property Types
  • How Supply Chain Issues Impact CRE Investors

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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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