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Quick Insights: Commercial Real Estate Investment and Finance Outlook 2020

Commercial real estate as an alternative investment is unlike any other due to its level of complexities, the players that are involved in many sectors and the overall economy.  Instead of regurgitating the 2020 real estate market outlook report that Coldwell Banker Richard Ellis (CBRE) recently published, this piece will simply highlight some key economic figures, summary of some of the main points of the CBRE report, and a few points in the capital markets space that are critical for borrowers and lenders alike.

Source: Millionacres A Motley Fool Company

Although many pundits have given the economy a low grade the past couple of years. When one looks at the Bureau of Labor Statistics (BLS) and analyze the numbers for Current Employment Statistics (CES) and Consumer Price Index (CPI), which measure changes over time in prices in markets by consumerism, that number rose 2.3% over the last 12 months. The previous year that number was 1.6%, indicating that consumer strengths are still high – boosting the economy.  The last CPI to be released by BLS was +.02% in the last quarter of 2019. The next release will be on February 13th 2020. As for CES, the unemployment rate for U.S stands at 3.5% with notable jobs gain in sectors such as health care and retail trade jobs.  This number is not 100% accurate when taking into account a large sector of the population that have either recently left the job force, or stop seeking work completely.

CBRE reported that investment volume for 2020 will reach between $478 billion to $502 billion. This will be on par with 2018 and 2019 respectively, making this year one of the strongest. Below are some of the critical excerpts from the CBRE report.

  1. Multifamily assets are positioned for continued favorable performance in 2020 but will experience some cooling due to new supply outpacing demand.
  2. In the office sector, new construction will outpace net absorption, resulting in a slight increase to the national vacancy rate and a slowing of rent growth to a 1.6% gain.
  3. As far as retail, rents and net absorption are likely to post small gains due to a relative dearth of new retail construction. The trends that are likely to take place in 2020 are developers converting malls to mixed-use complexes, health and wellness center uses more space, and Generation Z boosting foot traffic to retail centers.
  4. For alternative investments – a category CBRE list as: self-storage, data centers, medical offices, life science facilities, senior housing and student housing – has grown to a 12.5% share of all commercial real estate alternative investment in 2019 from 6% in 2007.  CBRE predicts the investment volume with this category will match the $59 billion annual average of the past six years.
  5. On the flexible-office front, this sector is expected to grow by 13% in 2020, down from the expected 23% in 2019. Additionally, flex office inventory should grow to 87 million square feet (Sq. Ft) by the end of 2020 – accounting for 2.1 percent of the U.S office market.

In 2019 the Federal Reserve (Fed) battled numerous economic challenges, especially with manufacturing, exports, trade disputes, to keep the economy at bay, by cutting rates three times by 25 basis-points (bps). These actions supported the capital markets space for commercial mortgage originations and aided many sponsors, and owner-occupied real estate businesses alike.  Fed sources pointed to the 10-year Treasury yield below 2% for 3Q2019 and it slightly rose in 3Q2019 but fell again below 2%. There is no indication that 2020 will be disruptive on the interest rate front base on 4Q2019 last rate cut.  The few economic risks and low inflation rate give the Fed no big incentive to shift interest rates. Borrowing cost are still low, making it a superb time for investors, small to medium businesses and developers to take on smart debt for their properties, investments and projects.

Two years ago, when the Fed raised rates four times, many investors in commercial real estate and the stocks market were very skeptical about the overall financial markets – especially because we’ve never seen a cycle this long, 10 years and counting, since the Great Recession of 2008. The latter part of 2019 proved otherwise, as lending activities for traditional banks and alternative lenders increased compared to prior year.

Multifamily agency origination market and mixed –used assets set a record high on the financing in the last 2 quarters of 2019.  The loan purchase volume combine for Fannie Mae and Freddie Mac totaled $112.8 billion versus $90.7 billion for the same period in 2018. These numbers would have most likely grown in 2020. However, in 4Q2019, the Federal Housing Finance Agency (FHFA) caped a production limit to $100 billion for the Government Sponsored Agencies (GSE) for the next 5 quarters.  This will not change another record setting for the GSE as many more multifamily owners, investors, and borrowers will gravitate to better loan terms, rates, loan-to-value (LTV) and proceeds that are more favorable to their projects and properties.

Many financing pundits and Fed sources expect rates to remain flat. Due to this reason, the greatest news for lending institutions and borrowers too in 2020 is that as long as inflation remains modestly below the Fed’s 2% target’s rate, the justification for keeping interest rates low is exceptional.  Some of the major plausible reasons that could force the Fed to cut rates again in 2020 are as followed: (i) unforeseen major economic downturn; (ii) markets catastrophe; and (iii) significant financial collapse nationally and on a global scale.

By: Ibsen Alexandre

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Ibsen Alexandre offers his opinions about real estate finance, business, and investments at www.Refivest.Com and other real estate publications. Additionally, Ibsen is a Senior Director in the Capital Markets Team at Highcap Group structuring debt and equity financing transactions in the Tri-State region and on a national basis for commercial real estate investors, owners, and developers.

He can be reached for financial, technical writing and consulting at ibalexandre@refivest.com

The opinions expressed herein are those of the author(s) and do not reflect the view of a firm, its clients, any respective affiliates nor any Media Platform. This article is for educational general purposes only and is not intended to be and should not be taken as solicitation for investments or lending.

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