Limon Net Lease Group

Archives for June 2022

Three Significant CRE Trends for the Rest of 2022

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3 Significant Trends That CRE Investors Can Capitalize On

Employment Recovery to Guide CRE Performance

  • U.S. recovered over 95% of jobs lost during pandemic, but recovery has varied by market
  • Cities that re-opened later, such as NYC, Los Angeles, Chicago and Boston, now seeing largest job gains
  • CRE momentum to follow job recovery

Ongoing Migration Patterns Benefit Suburban Properties

  • Much focus was placed on state-to-state migration, but most moves were local and towards suburbs
  • Suburban flight was already in place due to aging Millennials forming families; Accelerated by pandemic
  • Office, Retail and other property types expected to follow

Lifestyle Changes Support Leisure and Entertainment

  • Spending on travel and entertainment expected to increase; Not yet fully recovered but momentum present
  • Led by leisure travel, Hotel occupancy climbed above 60%; Business travel still recovering

*As of May 2022
Sources: Marcus & Millichap Research Services, BLS

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What the Fed Rate Hike Means for CRE Investors

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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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Are We In A Housing Market Bubble?

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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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CRE Investment Overview and Outlook

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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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