Amid Wall St. Turbulence, CRE Holds Steady

CALABASAS, CA—Commercial real estate continues to outperform amid global turbulence in the equity markets, Marcus & Millichap says in a special report. In contrast to the wobbly state of the Shanghai Stock Exchange, which set off a “surge of volatility” that pushed the S&P 500 down by nearly 10% in a week, commercial property investment has “a stable foundation” of a sound US economy and other points of support, according to MMI.

An influx of domestic and international investors seeking the security of hard assets have served to “boost commercial real estate liquidity and support increased property values,” according to MMI. The report points out that the recent stock market turbulence reflects global uncertainty rather than US economic performance, which remains positive. Domestically, the economy has added 1.7 million jobs so far this year, bolstering demand for CRE.

“Indicators including job creation, consumption and the housing market continue to post steady gains, reiterating that core economic trends will reinforce solid growth,” according to the MMI report. “Though there is some risk that an international shock-level event could create contagion and cause the economy to stumble, the probability remains minimal.”

Along with solid albeit unspectacular economic fundamentals, the various CRE sectors have a below-average development pace in their favor. “New construction for most property types remains low given the current stage of the cycle,” the report states. In the case of retail, for example, the 47 million square feet of new space scheduled for delivery this year is about one-third the volume of deliveries seen in the years prior to the recession.

The report cites other macroeconomic factors benefiting individual property types, such as the steady gains in both business and leisure travel that have been generating “record-setting hospitality performance.” Across the board, the report states that the “competitive commercial real estate yields” are continuing to benefit from the low interest rate environment.

About that low interest rate environment and the prospects of it remaining the status quo, William Hughes, SVP of Marcus & Millichap Capital Corp., notes that the recent equity markets turbulence may have caused the Federal Reserve to hit the pause button for the moment. “The surge of volatility that hit Wall Street sparked a rapid flight to safety into Treasuries,” Hughes writes in the MMI report. “The yield on the 10-year Treasury dropped from about 2.2% to below 2% in four trading days. As the dust settled in the ensuing week, Treasury yields recovered, returning to the 2.2% range. The whipsaw performance could delay the much anticipated September Federal Reserve rate increase.”

Although “broad-based economic momentum” continues to make the case for Fed action, Hughes points out that “market instability could restrain any movement. Because inflation remains in check, the Federal Reserve still has maneuvering room, and its highly cautious positioning has delayed action until December or even into 2016.”

The recent stock market volatility did make an impact on at least one CRE metric this past month: the performance of publicly traded REIT stocks. “August was a very difficult month for investors,” NAREIT's Brad Case said in a video segment earlier this week. There really wasn't any safe place to be invested.”

SVP for research and information at NAREIT, Case said in the latest edition of the association's Quick Study series that REIT investors should concentrate on the long-term benefits of the asset class, rather than temporary market volatility. “We're still in the middle of what I expect to be a strong bull market in the real estate asset class,” he said.