CRE Info Chicago - December 2018
CRE Info is James Scully's periodical of commercial real estate research & articles intended to equip building owners with the market knowledge to make more strategic real estate investement choices.
Opportunity Zones - What are they?
Investing in real estate located in an Opportunity Zone is an expanding market opportunity that is worth pursuing, or at least understanding. They are designed to incentivize long term investments in economically distressed areas by enticing investors with capital gains tax deferalls.
Once an Opportunity Zone Fund is established, capital gains are invested into it, the fund purchases the real estate, and the original capital gains are deferred until the earlier of selling or 12/31/26. At that time, if owned for 5 years, the gain included in gross income is reduced 10%. If 7 years, 15%. If the investment was held for at least 10 years, the taxpayer is exempt from capital gains tax on the sale. Talk to an attorney for more.
Opportunity Zones - Where are they?
In the city of Chicago they're clustered along I-290 on the west side and I-90/94 on the south side.
Here's a closer look. In my opinion, the most strategic places to target within these zones is where crime is lowest and where the zones border other areas that are undergoing appreciation in value. Please inquire to discuss further.
Corporate Debt to GDP Ratio
From "Federal Reserve Economic Data"
This is a scary graph for anyone interested in bracing for the next recession. The y-axis is corporate debt as a % of gdp. As you can see, the last 3 recessions occured at the peak of a surge in corporate debt to gdp, and from the looks of it, we're in the late stages of yet another surge, this time even higher than ever before.
One compelling economic theory is that after the last recession, none of the underlying issues of bad debt were resolved. They were simply transferred from home mortgage debt to corporate debt via quantitative easing. The Fed accomplished this by buying an enormous amount of treasury bonds, driving down yields, and corporations chased those yields by issuing huge amounts of their own bonds, packaged them as corporate backed securites, and then pumped that borrowed money into their own stocks. It's a recipe for disaster when that debt inevitably becomes too expensive to service. Another credit crunch may ensue, sparking a massive sell off in bonds and stocks.
How does this effect commercial real estate? Remember that commercial real estate competes with stocks and bonds for investor dollars, so when the yields on bonds shoot up, cap rates on real estate will too. Plan accordingly.
New Home Sales - Months on Market
From Calculated Risk
Months of supply has finally broken out of the 5 month average since the stable period of expansion and is pushing for 8 months. These are single family homes, but the multifamily and commercial market moves more or less in conjunction. Definitely something to continue to monitor, as obviously longer periods of supply mean either demand is weakening or there has been too much construction and it is taking longer to be absorbed.
In all, my feeling is that if you're going to sell within the next several years, now is the time (if it isn't too late already). But if you're going to buy, you may want to wait and see if this becomes a buyer's market again.
Cost of Multifamily Construction
From Fannie Mae (inquire for packet)
According to Fannie Mae, new apartment construction costs on a 1-3 story apartment building have gone from the national average of $148 per square foot in 2013 to $192 per square foot in 2017. That means a 4000 SF building's hard and soft costs in 2013 cost on average $592,000 in 2013, and $768,000 in 2017. That is a 30% increase in 4 years.
Strategic Analysis Model
From CCIM
I created the chart below from my CCIM (Certified Commercial Investment Member) study. It's a boring model, but like most models, it works if you work it.
Thanks,
James