External Affairs

[Alyssa Bray]

Various economy issues were frequently cited by our members as an issue for the 2018-19 Top Ten. Here are some of the responses we’ve received so far.

• Risk of higher inflation and global trade wars creates higher public market volatility, arbitrage opportunities across capital stack and public to private – M & A  activity – price declines seen recently in public markets likely to show up soon in private markets
• Improving economy, more wealth, full employment – also rising interest rates. Full employment is both good, and bad…
• National debt is increasing, we have political gridlock, and risk of inflation is an increasing investor risk.  Rising interest rates and more interest rate risk for investors.
• State and Local Government balance sheets. The US has been enjoying a historically long recovery and the resulting “good times”. During this time we don’t seem to have made much progress with 1) unfunded pension obligations, 2) Health Care, and 3) Infrastructure. If not now, when?
• Interest rates are going up and will continue to do so. LIBOR rates were mentioned (the one year has gone from 1.8 to 2.5, and shorter terms follow a similar path). The 10yr Treasury is around 2.8 and will probably find the mid-3s this year. And, of course, the Fed is poised for at least a couple or more hikes this year. The effect on real estate is fairly obvious.
• Job Creation, or the lack thereof
• The low yield environment and too much money looking for investments is occasionally pushing real estate markets to oversupply, if they are not constrained by cost or infrastructure . A college town of 90,000 located well away from major employment centers saw the development of five new 100+ room hotels last year, even though room rates were not all that high to start with.
•  The increase in interest rates is: Causing some owners to become sellers,  Raising cap rates on private capital sized transactions, Causing bankers to underwrite loans with higher debt coverage ratios because they want the property to be able to underwrite at a higher interest rate when the loan matures, Also resulting in higher equity requirements, Decreasing REIT stock valuations
• Significant shrinkage risk in low growth markets particularly in the northeast if immigration declines.  These markets will also expand only in older age categories.
• Lack of transaction transparency and lack of individual property risk analysis and metric/measure.   Lack of transaction transparency clouding markets and investor decision-making and raising investment uncertainties and risks
• Chinese government tightening overseas investments

Have any information to add? Share your comments below, and feel free to share articles and data illustrating this issue.

[Dr. Victor Calanog, Ph.D., CRE]

This is a very broad topic that could use a little focus. Interest rates may well be both a short- and long-run concern especially for lenders in the real estate space. Cap rates have been floating at relatively low levels for many years – when will cap rates finally feel the pressure to rise? When the 10yrTSY breaks 3.0%? When it floats between 3.0-3.5%?  Lenders certainly appreciate an increase in spreads, but are interest rates rising too quickly for everyone’s comfort?

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