Monday, July 21, 2014

Commercial real estate enjoys double-digit growth



Commercial real estate prices have yet to exceed their pre-recession highs, but they are getting close, according to the repeat-sales indices of the Co-Star Group. As the chart above shows, Co-Star's value-weighted index of commercial property prices has been rising at about a 10% annualized rate for the past four years. That's a pretty impressive recovery in my book, even though prices in inflation-adjusted terms are still 12% lower than their 2007 highs. (The Value-Weighted Index is a more liquid, and thus more reliable and more responsive index, than the Equal-Weighted Index.)

The first thing I think about when looking at a chart like this is that it flies in the face of the Fed's ongoing concern about the health of the U.S. economy. Short-term interest rates shouldn't be at zero in an environment of double-digit price gains for the commercial real estate sector, since it invites excessive speculation.

For the time being, however, it looks like commercial real estate will continue to boom. As Calculated Risk notes, distress sales have been steadily declining for the past 3 years. As Co-Star notes, "in the early-recovery, coastal markets of Los Angeles, San Francisco and San Jose, distress levels are nearly non-existent."

22 comments:

William McKibbin said...

A recovery cannot be declared until former highs are reached -- moreover, an economic recovery is irrelevant for short-term bond holders -- the fastest way for bondholders to make a premium in the near future would be a period of strong deflation -- the more deflation, the higher the bond premium for current owners -- just ask Scott...

theyenguy said...

The trade lower in the Defensive Sectors, DEF, such as Utilities, XLU, Global Utilities, DBU, International Energy Producers, IPW, Energy Service, OIH, Global Agriculture, PAGG, Consumer Staples, KXI, and Insurance, KIE, evidences the beginning of the extinction of the investor, coming on the failure of credit on July 2, 2014, (seen in the strong trade lower in Junk Bonds, JNK), and the death of currencies, seen in the Emerging Market Currencies, CEW, the Euro, FXE, and the Swiss Franc, FXF, trading lower the week ending July 15, 2014.

One should be short the stock market.

One principle of short selling is to sell at a market top; it would have been wise to go short these revenue sectors as they rose to their market top; which included Rental Management Company, BX, Industrial Office REITS, Premium REITS, Residential REITS, REZ, Hotel REITS, and Retail REITS.

Industrial Office REITS have been a favored debt traded investment, as investors have pursued yield, the PE of Industrial Office REITS now stands at 44.

One should be short the popular Industrial REITS, CUBE, STWD, EXR, HASI, PSA, BXP, BAM, MINI, BDN,.... seen in their ongoing Yahoo Finance Chart.
http://tinyurl.com/lw8h5my

Benjamin Cohen said...

Scott Grannis raises excellent issues here. Capital is hungry for returns, chasing yields in real estate---globally btw.
Yet we recently saw Yellen opine tech stocks overpriced.
Do we really want to say free markets lose their marbles in low interest-rate environments? EMT no longer applies?
As the Fed halts QE we see 10-year Treasuries at 2.5 percent. Perhaps the Fed can push short-term rates around but a central bank can't tighten its way to highe (real) rates for long...low real rates are a key sign that the market thinks monetary policy is tight...and that capital is abundant...
Oddly, we may see rates fall from here if economic growth weakens at all...and the Fed has signalled no more QE...fascinating epoch ahead hope for the best for everybody....

steve said...

the fed chair's have completely overstepped their bounds as re comments on "value" in the market. the MARKET determines the value of a good NOT some outside observer. for a fed chair to act like a freakin fund mgr and say that HY bonds, retail and biotech stocks are over valued is the height of hubris and inappropriate not to mention just stupid.

William McKibbin said...

The main take away from all of this is to recognize that the Fed (and EU) are actively manipulating the markets in favor and support of bond holders, with only tertiary regard for other equities -- the primary concern of central bankers is protecting and defending the capacity of central banks to borrow in the global marketplace -- for this reason, inflation control is the primary focus of central bankers, with growth and employment taking a "back burner" status at best -- and given the extent of the US national debt, great suffering will be required by equity markets and investors other than bond holders in order to protect and defend the interests of bond stakeholders -- I continue to believe that the Fed is yearning for a period of stiff deflation, which would bring cheers from bond holders around the world -- the state of affairs in global central banking is dire and sad...

William McKibbin said...

According to Zacks, "periods of deflation have not necessarily equated to devastation in the stock and bond markets. Mild deflation, below 2.5 percent, seems to have little effect on the performance of the stock market or the bond market. When deflation goes above 2.5 percent, the stock market begins to deteriorate, as measured by a falling price/earnings ratio. This means that in times of deflation, each share begins to lose value relative to the earnings of the company, a situation that can quickly escalate into a vicious cycle, as seen during the Great Depression. When deflation rises above 2 percent, bond yields tend to decline due to falling interest rates. However, bonds issued by highly secure entities (e.g., US Treasuries] tend to remain fairly consistent."

http://finance.zacks.com/effect-economic-deflation-stocks-bonds-7088.html

Watch for a period of Fed/EU induced deflation in the next few years for all of these reasons -- it's no accident that bond investors are piling into US Treasuries with record low interest rates -- the goal is to protect themselves from deflation and default risks, between which US Treasures lead the way.

William McKibbin said...

PS: My best advice to unaccredited investors (annual earnings < $300,000; net worth < $1 million) is to take cover while you still can and keep a sharp watch out for the four horsemen of the apocalypse...

William McKibbin said...

PPS: Much more economic suffering will be required to save Federalism (and its sponsors from the military-industrial complex, medical establishment, Wall Street, and Federal workers) from itself...

William said...

theyenguy said...

"One should be short the stock market."

Oh, sure, I'll do that first thing tomorrow morning because: 1) your avatar is cute and 2) all those brilliant blogs you follow i.e. Culture of Life News, The Automatic Earth, World Socialist Web Site, etc.

LOL

William said...

William McKibbin

I haven't read anything you have posted in months. Why did you stop recommending dividend paying stocks and real estate for "qualified investors"??

Just would like to know your reasoning.

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William McKibbin said...

@William, I strongly recommend that accredited investors hold high quality dividend and rent-earning equities for the long-haul (30-years plus) -- I also urge non-accredited investors to acquire world-class skills that earn premium wages that convert into high quality dividend and rent-earning equities over a lifetime -- no changes whatsoever in that position -- I strongly believe that the members of the global 1% club holding world-class skills are in an excellent position to enjoy a high quality life-style during the 21st century -- I am terrified for the fate of the 99% crowd during the 21st century -- those in the 99% crowd should do whatever they can to join the 1% club in order to share in the best the 21st century has to offer -- members of the 99% crowd should be under cover keeping a watchful eye out for the four horsemen of the apocalypse -- thanks for your question.

PPS: The first step for unaccredited investors is to acquire saving equal to six months wages -- also, acquiring world-class skills is a vital imperative for escaping the 99% crowd and joining the 1% club.

Hans said...

I have asked this question before and not surprisingly no one has resounded.

Why would a banker trade his higher income earning assets (Bonds & MBS) for a paltry 25 points; (talk about income inequality) unless of course, your are underwater on your MBS?

What is wong with this picture??

Hans said...

I have asked this question before and not surprisingly no one has resounded.

Why would a banker trade his higher income earning assets (Bonds & MBS) for a paltry 25 points; (talk about income inequality) unless of course, your are underwater on your MBS?

What is wong with this picture??

Scott Grannis said...

Hans: notes, bonds, and MBS are risky assets because their price can rise and fall, whereas bank reserves are risk-free; that is the main reason. Banks wanted to de-risk and strengthen their balance sheets; swapping bonds for bank reserves fit the bill perfectly.

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adson stone said...

You may be an avowed procrastinator, but if you want to sell a house this year, start planning now. The process, say sellers, always takes longer than expected. So get your home inspected now; there may be unseen major repairs to address. Declutter, clean closets and shelves, store extraneous possessions and furnishings and other stuff that might keep sellers from picturing themselves in your space. Attend an open house or two to get an idea of how to stage yours. And move along: Owners still waiting for the market to peak should beware that this real estate cycle may be shorter-lived than last.
Ines Flax

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