CRE Market Update from RealNex – Outlook from Q2/2019August 27, 2019
On August 21, RealNex, a commercial real estate software solutions provider for commercial real estate professionals, hosted a webinar with their economist Dr. Jeffrey Fisher. I found the presentation to be helpful and interesting. The summary points were as follows:
- Returns for all sectors up except retail
- Market value index rose again this quarter
- Industrial still the leader of the pack although down slightly from last quarter
- Retail returns fall to negative territory after a reprieve last quarter
- Cap rates manage another all time low (four quarter moving average)
- Occupancy continues near all time high
When it comes to returns in the market, the industrial segment has been on fire for some time now. All sectors were shown and the pack mix was led by industrial with a large margin, next was office, then apartments, and retail was in last by a large margin. The hotel market was mentioned as well and it also showed a healthy return over last year but was not ranked in this portion of their presentation.
On the retail front, not all of the news was bad. We are all familiar with some of the negative buzz from companies like Sears, JC Penny, KMart, and Macy’s closing down stores. There is some positive news for those expanding like Costco, Ross Stores, REI, Ultra Beauty, and Sephora (to name a few).
When it comes to returns and comparing commercial real estate with the stock market, they showed that the S&P 500 had a 10-Yr Avg of 14.7% and the industrial building segment is the only asset type that is anywhere close to 14% (they showed industrial at just under 14%), all of the others (apartments, office, and retail) were at or below 6%.
On foreign investors, I found it interesting that they largest “cross-border” investor was Canada at 41.3%. All the other countries listed on the chart were below 4% and Hong Kong was at 1.2%. Next to Canada, Germany (3.2%) and Singapore (4.0%) were the two largest foreign investors. The top three states that get the most attention from foreign investors were New York (#1), CA, and Texas was third.
On the cap rate front, one would think that if industrial is leading the pack on performance that it would have the lowest cap rate. The opposite is true, from top to bottom, industrial has the highest cap rate, followed by retail, office, and then apartments. By the way, the cap rates they showed for all of these assets were in the 4% range!
The final segment they showed was around occupancy and rent growth. They broke it down by segment and as one would assume, industrial had the highest occupancy (~95%), next was apartments (above 90%), retail was next (still in the 90% range), office (90%), and finally hotels were around 68%. Rent growth was seen in all segments except hotels. The winners were industrial (+6%) and office (4.5%), apartments (3.9%), and retail was also positive (~2.5%). Hotels were the only negative at approximately -6.5%.
The survey had several polls throughout the presentation. The group sentiment was that they don’t think a recession is going to happen in 2019, maybe in 2020. Industrial is projected to stay in the lead but keep an eye on apartments and maybe office and retail too.
On a local basis, our market is mirroring the national trends. If you have any questions about our local markets and your specific situation, please don’t hesitate to give me a call. (925-239-1422) I look forward to helping you with your commercial real estate needs.