Nobody likes being corrected, especially an entire industry. But some are suggesting that one is overdue in commercial real estate. And some outside data seem to say that things are slowing.
JP Morgan cut its third-quarter GDP annualized growth forecast from 7% to 5%, Dow Jones reported. Morgan Stanley chief US equity strategist Mike Wilson reportedly said that as fiscal stimulus ends, the S&P 500 could see a 20% correction, according to The Street. A drop in equities could make them more appealing and draw some money away from alternative assets like real estate.
For some, that future is already here.
“For the first time in over a year, clients are reporting some softness in sale prices in what had otherwise been very strong markets, such as senior housing and apartments,” Kyle Hauberg, director of Dykema’s real estate and environmental services department, tells GlobeSt.com. “This is likely due to a combination of very aggressive pricing by sellers and some hesitation on the longer-term outlook by buyers and investors. Industrial continues to be very strong.”
Certainly, we are seeing cap rates of select asset types, particularly apartments and warehouses, compress at such a tremendous rate that the trajectory is realistically unsustainable, especially if you believe interest rates will increase over the intermediate-term,” Aaron Halfacre, CEO of Modiv, tells GlobeSt.com. “That said, buying opportunities do exist but your strategy needs to be focused and your underwriting thorough. Even with tighter cap rates, we are seeing compelling opportunities in the single-tenant net lease sector.”
Others also suggest a measured and detailed approach. “JPM’s forecasts around Q3 and Q4 are certainly relevant and indicative for the near term,” Brian Ward, CEO of Trimont, tells GlobeSt.com. “However, commercial real estate is inherently a long-term asset class, and unless there are certain transactions priced to perfection requiring near-term execution, then what goes on in Q3 and Q4 should not make a lot of difference.”
“We believe that the recovery momentum will not slow as much given where we started before the pandemic and all the money pumped into the economy from the government,” George Smith Partners managing director Gary Mozer says. “Growth is slowing because of supply chain issues, however conversely, commercial real estate transactions are speeding up because of potential changes to the tax code such as loss of 1031 tax treatment and increasing capital gains rate. This increase in transaction volume should offset much of the effects of the delta variant.”
Mozer adds that given the amount of money in the monetary system and the pressure it creates to invest, “investors are trying to invest in hard assets as an inflation hedge.” He adds, “Perception that the stock market is fully priced, and the bond markets are producing nominal yields, investors are pouring money into real estate. Real estate has historically outperformed on a risk-adjusted basis when economies are expanding, and inflation is diminishing returns.”
Mozer and others do say that some sectors are feeling the pinch. “Offices are still recovering from the impacts of the pandemic,” Dianne Crocker, principal analyst at Lightbox, tells GlobeSt.com.
“With low occupancy daily, corporations are postponing back to work plans.” And yet, she adds that “retail reinvention is well underway as companies are redesigning their spaces to appeal to today’s shoppers demanding more of an experiential visit than traditional brick and mortar.”
Randolph is a Multifamily Investment Sales Broker with eXp Commercial servicing Multifamily Buyers and Sellers in the Greater Chicago Area.