Real Estate Capital Scoreboard® – December, 2017

Chicago, Illinois, December 1, 2017 – As the year is wrapping up, few investors worry about any damaging market conditions in the foreseeable future. Unfortunately, “easy money” deals seem to be gone for now, and profits much harder to hunt down per the following market comments:

“Values dropped, but prices haven’t” – After years of steady price appreciation, many markets now in supply-and-demand balance. Buyers have flatter profit expectations. Big data brings instant pricing feedback, but sellers don’t aren’t motivated to adjust expectations as quickly. Institutional buying activity dropping, but private buyers are stepping in. Favorable climate for purchasing Core rather than Value-add deals, as too many investors chasing higher yields.

“Lenders are not chasing the market” – Funding sources are competing for deals via spreads not in leverage, as more lenders enter the debt markets, including Wall Street. The conduit industry adopted very effectively to risk-retention regulations, assuring strong underwriting discipline. The plethora of other sources including debt funds, life companies and banks keeps pressure on spreads, even as benchmark rates rise. Borrowers often find lenders crossing traditional paths, with winning bidders difficult to predict. A great time to “shop the market,” especially for lower-leverage loans.

“Millennials want housing” – The new frontier of realty profits are being discovered in the single-family housing market. Heavily punished during the Great Recession, home-builders cautiously return with expectations of 5% or more growth next year. The timing could not be better, as pent-up demand from Millennials and natural population growth greatly overshadow existing housing stock. The insatiable demand is stymied by restrictive consumer lending, rising construction costs and limited availability of sites in more desirable urban locations. Developers are creatively working with capital sources to formulate optimal financing strategies for homeowners (e.g., builders pay for student loans). However, apartment demand will hardly be dented by housing growth, as ownership costs are still beyond reach of many in the population segment.

John Oharenko, Director of the Real Estate Capital Institute’s®, states, “As commercial real estate gains more institutional ownership share, dramatic price volatility will subside for core assets. Value-add and smaller, entrepreneurial properties will behave more cyclically.”

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