Limon Net Lease Group

Research Brief

How Aging Baby Boomers Could Impact CRE

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DEMOGRAPHIC TRENDS: BABY BOOMER AGING​

11,000 Baby Boomers Expected To Retire Everyday in 2024​

  • Brain drain is likely to occur as some of the most skilled laborers in the economy transition out of full-time work​
  • At the same time, the aging population will bolster some types of select CRE space demand​

Select Industries Face Sharper Talent Loss​

  • Older workers are a significant portion of laborers in industries such as construction, agriculture and manufacturing​
  • These industries could struggle to maintain productivity levels during the wave of retirements​

Medical Office and Seniors Housing Demand To Rise​

  • As baby boomers age into their late 60’s and early 70’s, total doctors visits and demand for assisted living will increase​
  • Both sectors have recorded slow development of new space  in recent years, further raising the outlook for existing builds​

*Median age as of 2023;
Sources: Marcus & Millichap Research Services, U.S. Census Bureau, National Center For Assisted Living​

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Perceptions of the Investment Climate

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WHY SOME INVESTORS ARE RAMPING UP ACTIVITY WHILE OTHERS HAVE YET TO DEPLOY CAPITAL​

Is Now The Time For CRE Investors To Reengage​

  • Many investors are still waiting for clarity as others begin to reengage the market​
  • Competition is heating back up for certain property types and product niches, headlined by industrial and retail​

Cautious Investors Waiting For Certainty​

  • Investors still on the sidelines await positive leverage and economic clarity​
  • Less risk adverse investors are focusing on property CRE  space demand drivers that will likely build momentum​

CRE Performance and Demand Often Exceed Perception​

  • Property fundamentals are stronger than many perceive​
  • Despite minor softening in apartment and industrial demand, the long-term outlook remains positive, with absorption beginning to build momentum​

*Employment and retail sales through February; Real disposable income through January​
Adjusted for inflation using January 2023 Core PCE​
Sources: Marcus & Millichap Research Services, BLS, Federal Reserve​

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Impact of the March FED Meeting

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WHAT THE RELATIONSHIP BETWEEN THE FED FUNDS RATE AND CRE FINANCING COSTS MEANS FOR INVESTORS THIS YEAR​

The Federal Reserve Kept Rates Flat In March​

  • As expected, The Federal Reserve Maintained An Overnight  Rate of 5.25%-5.50% in March 2024​
  • Expectation for EOY 2024 show the Fed believes either two       or three 25 basis point rate cuts are likely this year​

Rate Cuts Will Not Make Lending Cheaper Overnight​

  • While the 10-year treasury moves with the Fed Funds Rate generally over the long term, many other factors influence treasury yields​
  • Heightened treasury issuance could raise 10-year treasury  rates, while reducing quantitative easing would have the opposite effect​

Investors Should Assess Deals Based on Today​

  • We can predict the Fed Action this year, but it is harder to predict how those actions will impact CRE lending right away​
  • Real estate fundamentals are generally strong, and CRE assets will remain a sound investment in 2024​

*February​
Sources: Marcus & Millichap Research Services, Federal Reserve​​​

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Why Aren’t we Seeing more CRE Distress

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WHY IS DISTRESS IN CRE SO LOW IN 2024?​​

Billions of Dollars Waiting TO Re-Enter CRE Markets​

  • Entering 2024, investment firms have set aside over 240 Billion Dollars for potential CRE purchases​
  • Many of these firms have been waiting for foreclosures ad distress, but so far there hasn’t been a large wave​

Property  Values Grew Substantially At The Start Of The Decade​

  • All property types, apart from office, have average price points higher today then they did to close 2019​
  • This means properties that traded in 2018, 2019, and 2020, are far removed from being in negative leverage situations​

Some Properties Acquired At Market Peak Could Face Distress​

  • While long-term pricing trends have shielded many investors from financing issues, properties acquired at the peak of the market cycle in 2021-2022 have seen annual valuations fall​
  • This mostly just affects investors who used aggressive underwriting practices and those who have limited capital on hand​

*Sources: Marcus & Millichap Research Services, Real Capital Analytics​​

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How Nearshoring Could Impact CRE

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WHAT SUPPLY CHAIN TRENDS MEAN FOR CRE DEMAND DRIVERS​

Imports Data Reveals Shift In U.S. Trading Partners​

  • For The first time in two decades, the United States imported more goods from Mexico than China in 2023​
  • This highlights the nearshoring trend that started after the global supply chain problems in 2021 and 2022​

Industrial Absorption Data Highlights Changing Landscape​

  • With more goods coming from Mexico than China, markets like Dallas, Austin, Houston, Phoenix, and San Antonio have recorded industrial absorption above previous levels since 2019​

Shifting Supply Chains Affect All Forms Of CRE Demand​

  • While southwestern industrial markets stand to gain from the trend, it will also create more jobs, income, and housing demand​
  • As a result, these locales are poised to see heightened apartment, retail, industrial, and self-storage utilization​
  • Shipping costs may normalize as political conditions improve; but nearshoring is a trend for investors to watch closely​

*Sources: Marcus & Millichap Research Services, McKinsey​

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January CRE Foreclosures

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NEW DISTRESSED ASSET DATA AND WHAT IT MEANS FOR INVESTORS​

CRE Foreclosures Are Inline with Pre-Pandemic Norms​

  • CRE foreclosures in the month of January rose nearly 100% from 2023, likely impacting urban office assets strongly​
  • However; the current level of 635 is just slightly ahead of the 2014-2019 average for CRE foreclosures in each month​

Debt Set To Mature in 2023 Differed into This Year​

  • New FDIC guidance empowered banks to offer Commercial Real Estate borrowers’ extensions last year​
  • As a result, between 1/3rd and 2/3rds of the CRE debt that was set to expire last year will now mature in 2024, 2025, and 2026​

Expect Trickle of Distress Rather Than A Tsunami​

  • With CRE fundamentals and bank balance sheets strong, its unlikely we will see major distress in the market this year​
  • Well preforming asset types like industrial, apartment, and retail are unlikely to be foreclosed on or traded at discounts​

*Through January​
Sources: Marcus & Millichap Research Services, ATTOM​

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