PARTNERS, Thought leadership

Bear or bull: CRE’s investment prospects

The commercial real estate (CRE) reporter Konrad Putzier recently published a fascinating article in the Wall Street Journal (WSJ) about the sector’s resilience, and specifically investors’ confidence in that resilience. Published in May 2020, the article unpacks the factors that have worked into the sentiment analysis, showing that despite the hard knocks of the pandemic, there is a lot of positivity about the future of CRE.

No small troubles

In many ways, CRE was a prime candidate to be severely impacted by shelter-at-home orders and the migration of workers to their homes. High-rise office buildings, the report starts, stood largely empty, and around a half of hotel rooms went unoccupied. Retail was also under severe pressure. Despite these layered burdens, the CRE market in the US remained relatively strong and is looking up in 2021.

“Prices fell far less than after the 2008 financial crisis and are already rising again,” he writes. “The number of foreclosures barely increased. Pension funds and private-equity firms are once again spending record sums on buildings.” This is, the article argues, partly due to the federal government taking bold measures to support landlords and protect them from “suffering steep losses”.

According to Green Street analytics quoted in the piece, CRE prices did fall some 11% in the March to May 2020 period (compared to 37% after the 2008 crash), but have rebounded by 7% – “erasing more than half their pandemic declines”.

Investor confidence

The sector’s other saving grace is that it remains a darling of investors. The WSJ points to “big global pension funds… raising their allocations to commercial real estate”. Private investment funds with a real estate focus had $356 billion in cash reserves in April, and a study from Cornell University and Hodes Weill & Associations found that 29% of large institutions said they planned to increase their CRE exposure.

Inflation haven

Analysis from Globe St underlines some of the same findings as the WSJ report, specifically in that real estate is profiting from its perception as an inflation hedge, and despite a high vacancy rate for offices, it describes analysts as “still bullish on the sector”. In fact, real estate investment trusts (REITs) have been the best performing asset class in 2021 so far.

Moody’s however takes a more cautious view. Also speaking to Globe St, they say, “while industrial will remain steady and multifamily family rents and vacancies will turn around in the short term, the future of office, retail, and some hotel subtypes is uncertain”.

Part of the package

The contemporary CRE investor can however bet on both outcomes through diversification. Writing for the Forbes Real Estate Council, Andrew Lanoie of The Impatient Investor has penned an even-handed explanation of the divergence of real estate and CRE prospects in tough economic times, and how CRE in the investment portfolio – diversified by type and region – can still carry its weight in your wealth strategy.

In fact, he concludes “investing in commercial real estate the right way can shield your portfolio from the next downturn.”

Social: Are you bullish or bearish on the CRE investment prospects? Tell us what’s driving your investment choices in this volatile time…

Thought leadership: How CRE fits into corporate strategy

The cliché of “Location, location, location” applies in commercial real estate (CRE) as much as residential, but what factors you bundle into that assessment are, naturally, vastly different and should be explicitly tied to corporate strategy. That’s the realm of corporate real estate management (CREM).

Corporate decisionmakers

A savvy corporate client on the hunt for premises will be asking whether a proposed site will support their corporate goals.

When considering a potential position for offices or logistics, for example, an assessor might ask about the transport links, the nearby shops and facilities. They may consider perception and whether the location is in keeping with brand identity.

They will need to understand the current and future demands the company will make of a location, and how the lease or sale terms will be perceived by a board or management team.

Access to (human) resources

There is another oft-overlooked location factor that NAI argues should form part of a CRE strategy: talent and access to the right people.

This is the nature of cities or areas that become hubs for specific industries and sectors: they have a rich pool of workers with the right mix of skills to draw from. If you’re looking for the top geologists in the world, you probably want to focus on an area associated with mining. Want people who are passionate and knowledgeable about the ocean? Try Hawaii. Silicon Valley, and increasingly Texas, are meccas for the technically minded.

There’s remote work and transferable skills to consider, of course, but generally speaking a talent pool linked to an area is self-sustaining, in the way that Silicon Valley and Stanford will always be linked in their mutual development paths.

What type of staff you envision filling your hallways and boardrooms will also inform other location considerations: like access to good schools, parks, or public transport.

Property as an asset

Last but definitely not least, the right property is an asset and an investment with future dividends. This is why a smart broker, or their corporate client isn’t just looking at what is now, but what could be, what’s on the horizon, and any prevailing trends that need to be considered.

A client with explicit return on investment (ROI) expectations or a particular appetite for risk – as just two examples – should place that information on the table from the get-go, as premises can be (and often are) serving the dual purposes of functional and financial.

Remember: business strategy should drive a real estate decision, not the other way round.

CRE Capital Markets: making money work for you

The capital markets function within commercial real estate (CRE) is such a huge part of the property industry these days but is still quite poorly understood by those on the outside. Yes, there is a certain magic to bringing all the right elements together to support a smart capital market deal, but that doesn’t mean it’s a mystery or unknowable. Conquering capital markets is a matter of strategy and value. You just need the right partners to guide you.

Course 101

Let’s get back to basics: If you are talking about capital markets as a general term (not necessarily within real estate), then you are describing a place for buying and selling stock, bonds, and debt instruments. A stock exchange, like the NASDAQ, is a type of capital market.

Zoom back into CRE

Within CRE then, you can see how capital markets are places for brokering financial deals specifically in property. When a brokerage, like ourselves, offers capital markets as a service this means we are providers of capital solutions relating to property. This can mean solutions for investors and for occupiers and may include advising on investments, recapitalizing, or debt placement – what’s on offer really depends on the brokerage and its own expertise in-house.

NAI Global’s capital market services include:

  • Investment sales
  • Note sales
  • Live and sealed bid auctions
  • Debt placement
  • Acquisition advisory

The right capital market partners

A capital markets service provider needs two overarching things for success: A depth of knowledge (expertise in the financial specifics and deal types), and a breadth of network (access to the right people and right primary and secondary markets).

Emerging trends

From crowdfunding to app-based finance, capital market professionals are also facing a wave of innovation and change, largely driven by factors like digitization and the fourth industrial revolution.

“Evolving technology means the barriers to entry are coming down, but expertise and experience continue to be what sets capital market service providers and consultants apart,” explains Jay Olshonsky, President & CEO of NAI Global. “That’s what you want on your side when you’re looking for the capital solution you need.”

Data demonstrates 2020’s brutal construction slump

The Real Estate Board of New York (REBNY) confirmed this week that construction activity on New York City’s Manhattan Island had – predictably – slumped in 2020, to almost its lowest level in a decade.

The World Property Journal detailed the findings of REBNY’s Q4 2020 New Building Construction Pipeline Report, highlighting that “new building filings in 2020 represented a proposed 42.67 million construction square feet, which is an approximately 28% decline compared to proposed construction square footage in 2019”. This was, the report said, the lowest total since 2012.

Residential units proposed for construction in 2020 declined by roughly 17% compared to 2019, the report found.

Promising plans

The study, however, is not all ‘doom and gloom’, stating: While this new analysis highlights the ongoing challenges faced by the construction industry due to the devastating impacts of the Covid-19 pandemic, it also follows some promising recent infrastructure and construction plans being put forth.

Global effects

These sectors are important job creators around the world, and many states and countries are still counting the costs of the ongoing pandemic:

  • A new report by the Associated General Contractors of America shows that Texas had the sharpest construction jobs loss decline in the US shedding 33,600 building industry jobs in December, compared to the same period the year before, according to Dallas News.
  • In Northern Ireland, says the Irish Times, data indicates “firms reporting a deterioration in profit margins outnumbered those reporting an improvement by 11 to one”.
  • London’s Southwalk Council is calling on construction workers to participate in their rapid testing project, as the UK government begins rolling out vaccines to those that cannot work from home.
  • And ConstructionCanada.net is reporting that both construction jobs and the economic recovery of Ontario is at risk if their government doesn’t bed down the post-pandemic “restart” agreement and plans for financial assistance. This comes from the Residential and Civil Construction Alliance of Ontario who say municipalities will have to scrap repair projects if funds aren’t forthcoming.

“The ramifications are ongoing,” says Jay Olshonsky, President and CEO of NAI Global, “A set-back like this is painful, but if we’re looking for silver-linings it does give the industry pause to consider how it can return stronger, in sustainable and greener ways.

NAI Pleasant Valley announces the sale of 37,000 +/- SF office building in Shaker Heights, OH

Cleveland, Ohio – June 2, 2020 – NAI Pleasant Valley is pleased to announce that Gerilyn Gleason, CCIM and Jeffrey Kahn represented the Seller in the recent sale of a 37,000 SF +/- office building located at 20820 Chagrin Blvd., Shaker Heights, Oh. The office building is steps away from Van Aken District.  A Local Buyer is planning to occupy the property.

About NAI Pleasant Valley

NAI Pleasant Valley is the Northern Ohio office of NAI Global, a leading global commercial real estate brokerage firm. NAI Global offices are leaders in their local markets and work in unison to provide clients with exceptional solutions to their local and global commercial real estate needs.

To learn more, visit www.naipvc.com