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| 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.
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| 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.
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| 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.
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| 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
