Thursday, January 2, 2020

RECI Sees Real Estate Industry Starting 2020 on a Positive Note



John Oharenko

Chicago, IL, Jan.2, 2020 –-Chicago-based Real Estate Capital Institute kicks off 2020, recapping 2019 highlights. They include:
·        Last year closed as a milestone period for the US economy. 
·        The stock market hit new record highs, experiencing the best gains since 2013.  
·        The Fed dropped interest rates three times during the year and decided to keep rates unchanged at the most recent meeting. 
·        Furthermore, unemployment levels witnessed fifty-year lows.  Most investors' biggest fears rest upon worrying about how long economic conditions continue into the new year and beyond. 

Class A Office Market


 RECI  executive director John Oharenko adds,  "the new decade brings in the enduring prosperity of the previous decade, with no immediate end in sight.”

 All worries aside, pundits find many signs of optimism for 2020, with real estate capital markets sharing the euphoria characterized by a low-rate investment environment facing ongoing yield compression.

 More Low Rates:  The downward rate trend continues, despite trade wars, labor shortages, and inflationary pressures.  Far too much capital chases too few goods. 

 Very limited investment options force both real estate debt and equity investors to tolerate low yields.  Also, more global capital floods the US, both for safety and yield.  

Class A Multifamily Market

For example, during the past month five-year, and ten-year Treasury notes barely nudged higher less than ten basis points.

 Yield Compression:  Core, core-plus, value-add, and opportunistic investment real estate returns endure yield compression. 

 Two hundred basis points represent typical yield differentials between various investment categories.  Core investments in gateway markets attract pricing below 5%, while core-plus ventures experience mid-single-digit returns. 

 Value-add projects target lower-teen returns.  Only opportunistic deals offer any substantial yield premiums, as new-construction and substantial redevelopment ventures require higher-priced risk capital, especially so late in the economic cycle.

Class A Industrial Market

  And for Class-A properties in prime urban versus suburban locations, narrower pricing differentials exist, in some cases only fifty basis points (e.g.,  multifamily). 

 Lower funding costs combined with rising construction and operating costs pinch profitability.  Scarce new supply barely disturbs property supply-demand equilibrium in most markets.  

The Real Estate Capital Institute® is a volunteer-based research organization that tracks realty rates data for debt and equity yields.  The Institute posts daily and historical benchmark rates, including treasuries, bank prime, and LIBOR.  

Contact:

John Oharenko 
 Executive Director


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