Commercial Real Estate

[Jenny Perron]

Despite Economic Upsets, Investment in Commercial Real Estate Holds SteadyIn their newly-released Capital Markets Report, commercial real estate services firm CBRE Group found that investments in U.S. commercial real estate totaled $166.8 billion in the second quarter of 2022, a glimmer of good news for the sector. Considering the explosive buying spree that took place at the end of 2021 (where investment volume reached $322.3 billion) it may seem like investment has dipped in dramatic fashion, but property markets are in a very different position than they were six months ago. Last year, demand for commercial properties soared and debt was inexpensive (the federal funds rate hovered at .08 percent). Investment activity in 2022 has slowed due to a number of factors: rampant inflation, steep interest rate hikes, commercial loan tightening, and an economy teetering on a recession. But investment activity hasn’t leveled off, it’s actually grown in the long-term. Even with higher borrowing costs, investment in commercial real estate increased by 10 percent compared to the same time last year. Additionally, portfolio transaction volume went up 31 percent year over year.Investors overwhelmingly flocked to the Multifamily sector. Second quarter activity totaled $78 billion, a year-over-year increase of 32 percent. Industrial came second with $31.6 billion and offices came third with $24.1 billion. Although forecasts for different asset classes vary, the industry’s prognosis as a whole is still favorable going into the second half of the year.

…

[John McKee]

i think its too early to tell with 2nd quarter results.  commercial deals take longer to close and recent interest rate hikes will have more impact on 3rd quarter and fourth quarter closings. some of those 2nd quarter closings already had interest rate locks as well.  

[Henry Clark]

@Jenny Perron

Don't disagree with any of your comments above. I have been talking with our bankers and I keep asking them all of our contractors are still going gangbusters and they don't see and end in sight. How can that be. Our three different bankers noted the Feds put so much cash into the system it is still sloshing around pushing activity out. And there was a lot of cash before covid stimulus, looking for a home. They said they still analyze the loan deals, but more people are putting more cash down on their projects thus the projects "work" for the banks (LTV). This offsets the higher construction costs.

The "end" of this Commercial spurt will come at some point.  

What I watch are the price charts for Copper, Silver and Cardboard/pulp.  Throw out all of the news cycles, talking heads, etc.  These charts are the buying patterns for 100,000 or more buyers throughout the nation and various industries.  Copper and Silver go into everything.  Cardboard is used for packing everything.  Look at the 1/3/5 year charts.  When you see these three plummet that is the indicator the economy is in a hard downward trend.  You will always have ups/downs, but the general trend and the plummet will be the signal.  

Action- you don't want to be caught with a lot of inventory (whatever that means to you) and you want cash (realize inflation is deteriorating it) when that happens.  Imagine all of the retailers who couldn't stock their shelves.  They place huge orders to get ahead of the Covid supply constraints, especially for Christmas.  If we get a downturn while they are still holding the inventory or while consumers are still holding the credit card bills; they will get hammered.

[Joel Owens]

I think more speculative commercial will get harder to finance with loans.

NNN investment grade credit tenants will still get awesome loan rates as the banks have less inherent risk in those types of deals with long term leases.