HOUSTON—Amid a still-plodding domestic economy, investors starved for yield are still looking for it in the safest place at the moment: commercial real estate. So says the August edition of Transwestern’s monthly “The Briefing” report.
“Both debt and equity markets remain highly liquid and competitive as commercial real estate continues to offer attractive yield to income-oriented investors and opportunistic upside for those investors looking for higher return and higher risk investments,” according to Transwestern’s chief investment officer, Tom McNearney. He notes that the first quarter saw a 13.5% year-over-year increase in CRE sales on assets valued at $10 million or higher, for a total of $74.1 billion in transactions.
Most commercial product types reported higher sales year-over-year for May, the report states. Sales of retail properties increased 75%; office sales increased 17%; and multifamily sales increased 11%. Industrial sales, however, decreased by 10% year-over-year for the month of May.
Although unrest in Gaza, the Ukraine and Syria is creating recent market volatility, early Q2 indicators show continued improvement in the US economy, says Transwestern. The Q1 FDIC Bank Report noted several positive signs. Among them was a decline in the number of banks on the problem list from 467 in Q4 2013 to 411, with $216.1 billion in assets; and Y-O-Y improvements for 54% of banks.
The Wall Street Journal this past weekend noted the strength of the CRE sector, although it also took note of some potential dark clouds on the horizon. On the positive side, the Dow Jones US Real Estate Index, whose components include REITs as well as mortgage, realty and forestry companies, has climbed 92% since early 2009.
“That gain, amid a rise of about 20% in the median price of new and existing homes over the past two years, is a bit less than the 114% rise for the S&P 500 index,” according to the WSJ. “But it’s an impressive recovery for a sector devastated by a historic slump starting in mid-2007.”
However, the WSJ cited a slowdown in the housing recovery, as evinced by the most recent Case-Shiller Home Price Indices from S&P Dow Jones Indices. The year-over-year increase for May, as reflected in the latest monthly Case-Shiller report last week, represented the lowest annualized gain since February 2013. On a monthly basis, home prices fell 0.3% in June, the first negative month since January 2012. “ “The first-time home buyer is just not the factor that it once was,” Peter Boockvar, chief market analyst at the Lindsey Group, told the WSJ.
In the REIT sector, the current low-interest-rate environment is making real estate trusts among the highest-yielding investments, according to the WSJ. That could change if interest rates begin rising, as is now an increasing likelihood. “Yields on 10-year Treasuries climbed as evidence grew that the US economy had firmed, making a rate boost more likely,” the WSJ reported. Further, REITs are considered expensive based on ‘adjusted funds from operations,’ a widely used metric for valuing these shares.”
In the short term, the best performing REITs have been higher-risk. “Smaller, highly levered REITs with lower-quality property portfolios [have] outperformed, Green Street Advisors’ Mike Kirby told the WSJ. Longer term, the WSJ reports that some analysts have rated larger, high-quality REITs with lower levels of borrowing “a better bet during the new period of uncertainty.”