Real Estate Capital Scoreboard® – November, 2017

Chicago, Illinois, November 1, 2017 – This month, Fed holds rates unchanged, but realty capital markets are less predictable. From the equity perspective, investors scramble to find any type of favorable commercial real estate yields, a daunting task. From the debt perspective, mortgage pricing and higher leverage debt still favors multifamily transactions, but other CRE deals are gaining favor, especially loans with lower leverage requirements. The most relevant capital market topics discussed today include:

Solid Economy: Unabated strong economic performance leads experts to believe that a 2% annual growth rate is acceptable, along with 1% growth in employment. These growth rates help to support record-low mortgage delinquency rates; conservative lending combined with constrained supply also keep CRE on a stable, steady path.

Value Add: The Value-Add investment realm is the most crowded space for fund raising. Abundant bridge, mezzanine and preferred equity funding sources populate the capital landscape, yet fewer opportunities generate targeted returns in the lower single-digit range. Borrowers looking for such funds mostly weigh these costs against their equity yields, which may be more competitive.

Grade Compression: Along the same line of value-add discussions, pricing between A-B-C Grade properties is extremely tight. Capitalization rates on Class A versus Class C properties is as narrow as 200 to 300 basis points, nearly half the spread difference seen only a few years ago. In select markets, the flight to higher quality assets can be an easier buy on a risk-adjusted basis.

Sector Plays: Retail property investing is the most battered sector in the industry plagued by technological displacement and oversupply. US retail property inventory is approximately 25 ft.² per person, by far the highest ratio in the world. Simply too much space exists in the market, even without factoring the impact of internet shopping habits. However, retailing is evolving very quickly, and well-located properties providing enjoyable shopping experiences not available online will be clear winners.

The Real Estate Capital Institute’s® Director, John Oharenko, says, “Steady rates lead to extremely competitive pricing on purchasing assets, as the cost of debt becomes less of an issue regarding volatility.”

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