Limon Net Lease Group

Archives for February 2022

Are We Moving Past the COVID Pandemic and the Impact for CRE Investors

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Is the COVID Pandemic Turning Endemic?

Decline in Covid Risk Causing Shift in Policy

  • Covid cases in U.S. falling sharply – From 250 per 100k people last month, to about 30 per 100k in late-February
  • As a result, various states are rolling back mask mandates
  • Continued decline in Covid cases could further reduce restrictions, providing more fuel to the recovery

Behavior Changes Already Impacting Air Travel

  • TSA reported air travel just 8% below pre-pandemic levels
  • Overall Hotel occupancy in alignment with pre-Covid rates, but Hotels focused on business travel are lagging
  • When Covid becomes endemic, business travel should reemerge, providing momentum for full-service Hotels

Various Property Types Poised To Benefit

  • Share of workers in offices climbing after Omicron dip; Decline in restrictions could speed up the return to Office
  • Retail would also benefit, particularly experiential businesses, like gyms, restaurants, and movie theaters

As of February 23
Sources: Marcus & Millichap Research Services, Real Capital Analytics

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Research Report | Retail Sales February 2022

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Retailers Begin 2022 on a Strong Note as Shoppers Ramp Up Spending

  • Consumers step forward in January. After an early holiday shopping season led to a quieter than normal December, retail spending bounced back last month. Several sectors recorded strong gains, though online retailers and furniture stores posted the largest month-over-month increases at 7.2 percent and 14.5 percent, respectively.
  • Retail fundamentals to approach pre-COVID-19 levels this year. By the end of 2022, retail vacancy is anticipated to fall to 5.0 percent, only 10 basis points above the rate at the beginning of the recession. The downturn finally pushed many struggling retailers over the edge, but new businesses are rising in their place.
  • Tailwinds for some traditional retailers. The rapidly declining case counts are going to encourage more shoppers to visit general brick and mortar locations in the months ahead. This is especially true for eating and drinking places, which recorded a 0.9 percent decrease in sales month-over-month in January.

True Spending Gains are Cloudy

  • Inflation masks actual increase in sales. The consumer price index jumped 7.5 percent on an annual basis last month, largely overstating the increase in retail sales over the past year. A few components are the primary cause of the rise, including gasoline, autos and groceries.
  • Broader global reopening could provide lift to spending. Several areas of the world are reducing their restrictions, which should raise sales over the next several months.

*Through January; pre-recession is as of February 2020
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; U.S. Census Bureau

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The Role Foreign Investors Play in the U.S. CRE Market

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Foreign Investments in U.S. CRE Made Major Comeback in 2021


A Small, But Important Segment

  • Foreign investment in U.S. CRE jumped to $69B in 2021, up 36% from 2019; Makes up about 10% of total CRE volume
  • $33B placed in 4Q21 – Second highest quarter on record
  • In the last 10 years, Canada comprised 32% of foreign capital, followed by Singapore, China, Germany, S. Korea

Where is International Capital Flowing To?

  • Foreign investors favor gateway markets; New York, San Francisco, and Los Angeles lead the list
  • Apartment and Industrial comprised most sales activity in 2021; Office, Hotel, and Retail have also been favorites
  • Tend to favor portfolios and large assets

Foreign Investors Provide New Investment Opportunities

  • Foreign investors may accept lower cap rates since their yield alternatives may differ greatly from the U.S.
  • Some seek the stability of U.S. CRE – Willing to pay a premium to place large quantities in safe investments
  • For sellers with properties in the right segments, foreign investors can be a worthwhile consideration

Includes sales $2.5 million and greater
Sources: Marcus & Millichap Research Services, Real Capital Analytics

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Employment Research Brief | February 2022

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January Job Creation Highlights Recovery in Key Commercial Property Types

  • Employers tackling labor shortage in new year. The job market continued to recover in the opening month of 2022 as 467,000 jobs were created. While unemployment also rose, the labor force participation rate improved by 30 basis points to 62.2 percent, a post-recession high, as wage increases lured job seekers.
  • Recent hiring bolsters long-term outlook for office properties. January’s employment gains included 86,000 new professional and business services-related positions, surpassing the February 2020 total by 511,000 personnel. This expansion bodes well for office buildings long term, even though it is unclear how many employees are currently commuting to workplaces.
  • Retailers and hotels gain ground as new year begins. Lodging establishments, bars, restaurants and other stores continued to grow staff last month, adding a combined 212,000 jobs across the leisure, hospitality and retail trade sectors. The hiring underscores the ongoing demand for these services that is also reflected in improving property performance.

Noteworthy Trends:

  • Continued employment growth validates Fed actions. While the unemployment rate ticked up a mild 10 basis points to 4 percent in January, last month’s overall positive employment report only adds further weight behind the Federal Reserve’s tightening monetary policy.
  • Omicron’s impact goes beyond job gains. The creation of nearly 1 million new jobs over the past two months indicates that employers were broadly able to navigate the challenges posed by omicron and grow staffs in the winter months.

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics;
CoStar Group, Inc.; Federal Reserve Bank of St. Louis; STR, Inc.

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Will the Fed’s Hawkish Policy Shift Disrupt the CRE Investment Market?

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Fed Response To Inflation Could Impact CRE Sales Activity

Rising Inflation Prompting Fed Action

  • The Fed took major actions to avoid a recession; while the worst was avoided, rising inflation is now a concern
  • Now, the Fed is reversing course by reducing Treasury purchases and potentially raising overnight rates

New Monetary Policy Could Shape Investment Climate

  • Higher interest rates would push up cost of capital; rising interest rates not guaranteed to increase cap rates
  • Elevated capital liquidity creating aggressive CRE bid climate, putting downward pressure on cap rates
  • Rising costs and lower yields could slow transaction activity, impacting CRE prices and cap rates

What Should Investors Keep in Mind?

  • CRE remains a great investment to offset inflation
  • Major action by the Fed could influence interest rates and CRE pricing
  • Investors considering buying or selling should understand the opportunities available and how they may change

*Through December
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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Gross Domestic Product Research Report | Q1 2022

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GDP Growth Strong in Fourth Quarter;
Fed Actions To Play Large Role in 2022

  • Economy exceeds expectations in fourth quarter. Annualized gross domestic product jumped 6.9 percent in the final period of last year, largely on the back of an increase in inventories. Personal expenditures contributed nearly 2.3 percent to last quarter’s gain, primarily due to holiday spending that was spread throughout the period.
  • Commercial real estate well positioned. Uncertainty surrounds the ability of the Fed to both maintain maximum employment and rein in price increases. If the central bank overcorrects, it would temper or even suspend growth; commercial real estate, however, is in a strong position to weather these headwinds.
  • Hospitality poised for gains in 2022. While the worst projections for retail never emerged, the travel industry did take a large hit due to the impact of the pandemic. Since the dissemination of vaccines, tourism has markedly improved.

Challenges Still Ahead

  • Headwinds mounting for growth this year. Several factors will have a ripple effect on the economy in 2022, testing the Fed’s ability to maintain price stability and GDP growth. Inflation, which
    is at a 40-year high, is a prominent concern, and will require the Federal Open Market Committee to be more aggressive with rate hikes.
  • Employment situation challenged. Approximately four million jobs have not been recouped since the recession, despite the fact the unemployment rate is under 4 percent. The overall workforce
    has declined significantly as baby boomers have retired and some households have taken on added family care responsibilities or transitioned to one income.

Sources: Marcus & Millichap Research Services; Bureau of Economic Analysis;
Bureau of Labor Statistics; STR, Inc. U.S. Census Bureau

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