Monday, June 12, 2017

Commercial real estate alive and well

REITS (e.g., VNQ) have underperformed the broad market (S&P 500) by over 20% since early July of last year, thanks at least in part to concerns that e-commerce (e.g., Amazon) has rendered shopping malls obsolete. To illustrate this point, one REIT, SPG (Simon Property Group, the largest shopping mall and retail center owner in the country), has underperformed the broad market by over 40% since the end of last July. The graph below illustrates the divergences:

According to the latest data (April) from CoStar, prices for larger commercial real estate properties slumped beginning in mid-summer last year, but have rebounded of late. Meanwhile, their equal-weighted property price index (which captures the much larger volume of transactions for smaller properties) jumped an impressive 15% in the year ending last April, and has been posting double-digit gains for the past four years:

I point this out because the pessimism priced into REITs in general, and especially those that specialize in large commercial properties and shopping malls, may have reached extreme levels. Caveat emptor, of course.

UPDATE (6/21): The May release of the Architecture Billings Index rose to 53, marking the fourth consecutive month of growth. This is a good indicator of increased future spending on commercial real estate, and fully supports the thesis of this post. See Calculated Risk for more details.


Benjamin Cole said...

Not sure about this post.

"Commercial real estate slows across U.S.
By: Bloomberg News May 18, 2017 1:10 pm 0

Real estate developer Louis Ceruzzi has grand plans for a sleek $1 billion Manhattan skyscraper, featuring luxury shops and condos that soar high above Fifth Avenue.
Two years after Ceruzzi and a partner bought the site, they have yet to break ground. For now, all he has to show for his trouble is an empty lot, an idle backhoe and scattered piles of rubble.
The delay suggests an irony: even with election of Donald Trump, the first developer as president, commercial real estate investment has slowed to a near standstill—especially in Trump’s hometown, the nation’s largest market.
In New York City, first-quarter property sales plummeted 58 percent, to $4.3 billion, compared with a year earlier, according to data from brokerage Cushman & Wakefield Inc. It marked the lowest quarterly sales volume in six years. Nationwide, the picture wasn’t much better. Sales dropped 18 percent, research firm Real Capital Analytics Inc. found.
“People are just not making decisions quickly at all,” said Robert Verrone, a principal at Iron Hound Management Co., a New York-based real estate advisory firm. “Everything in real estate is taking longer.”
Much of the slowdown has nothing to do with Trump. Concern is mounting that real estate prices have peaked following six years of record-shattering growth, and there are signs of overbuilding in large cities such as New York and San Francisco — the biggest beneficiaries of the recent boom."

This is what most people are seeing in commercial real estate. A lull.

Green Street Advisors says commercial real estate prices have been flat since last August

Yes, bricks and mortar retail hit the hardest. And housing along West Coast not hit at all (tonight zoning). Distribution warehouses still hot.

But we might see a lull, or correction.

The Fed just added 0.25% of reason to banks not to lend. Banks can sit on reserves and get paid for sleeping.

Gee, does anyone suppose banks have good lobbyists working the Fed?

And when Fedsters leave the Fed, do you suppose they get jobs in…agriculture?

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