Commercial Investment Real Estate Winter 2020 | Page 26

T
urning the calendar over to a new
year is a good time time to reflect
and reassess. That holds true in com-
mercial real estate, especially in reallocating
capital and realigning investment strategies.
There’s no shortage of white papers and
research on capital markets by all industry
sectors of commercial real estate, ranging
from banking and brokerage to debt and
equity sources, but what today’s CRE prac-
titioner is searching for is a reconciliation
of the plethora of data and conflicting views
into an outlook that puts events and trends
into perspective and paints a clear picture of
what lies ahead in 2020.
CHAPTER 1: HEAVY INVESTMENT IN DEBT
First, let’s set the stage for this summary of
the capital markets entering 2020. Chapter 1
begins against the backdrop of $4.36 trillion
of investments on the debt side of the ledger,
according to Moody’s Analytics, the highest
since before the Great Recession — from all
the CRE lending entities, including REITs,
pension funds, government-sponsored enter-
prises (such as Fannie Mae and Freddie Mac),
construction lending banks, and permanent
debt sources like CMBS. The U.S. economy
is still chugging along into its 11th year of
recovery (125 months at year-end 2019), with
the November gross domestic product revi-
sions back up to 2 percent — and December’s
surprising Bureau of Labor Statistics report
showing 266,000 jobs created in November;
U3 and U6 unemployment levels declining to
3.5 percent and 6.9 percent, respectively; and
a 3.1 percent year-over-year wage growth. In
addition, banks are well capitalized and pro-
ducing gross revenues at levels that are the
best in a decade. Also, key credit metrics, like
CRE loan delinquency, are stellar.
The latest Mortgage Bankers Associa-
tion’s Commercial/Multifamily Delinquency
Report shows CRE delinquency rates of just
three basis points for life insurance compa-
nies; four and six basis points for Freddie Mac
and Fannie Mae, respectively; and 45 basis
points for banks. All these rates are down over
the period and year-over-year.
As the nation heads into a presidential
election year, how could conditions be any
better and what could go wrong? Instead of
resting on these laurels, let’s look beneath the
surface of this data and ask what signals war-
rant rethinking the direction and magnitude
of real estate investment in 2020.
CHAPTER 2: THE VECTOR CALIBRATION
Vectors are well understood by rocket scien-
tists as an invaluable mathematical function
to determine both the direction and magni-
tude at which aircraft travel. Applying that to
CRE, a vector calibration, in a modified ap-
plication, determines where and how much
investment is taking place. Think of the
SUNNY WITH A
FEW CLOUDS
where — both geography and property type
— as the direction aspect of the CRE vector
and the how — by geography and property
type — as the magnitude. Despite the whip-
lash to investment sentiment as a result of the
tariffs implemented more than a year ago and
a Federal Reserve that openly reverses course
(four interest rate hikes in 2018 followed by
three rate reductions in 2019), the ongoing
hunt for yield in a negative-yielding global
debt environment of more than $14 trillion,
according to Bloomberg News, suggests that
2020 could be another year in which capital
flows into U.S. commercial real estate remain
elevated due to a compelling risk-reward
yield premium.
CHAPTER 3: IT ALL STARTS WITH
THE ECONOMY
Capital allocations take their cue from
economic conditions, which is why an un-
derstanding of the underlying economic
conditions at year-end 2019 is integral to
forecasting the flow of capital into the indus-
try for 2020. CCIM Institute posits that eight
primary indicators have proven effective in
determining continued economic growth or,
conversely, the onset of a market correction —
GDP; employment; consumer optimism and
total retail sales; small business activity and
optimism; corporate earnings; FDIC-insured
bank lending activity and income growth;
CMBS and macro-CRE loan performance
and delinquency; and commercial property
price indices. These metrics at the time of
writing this article point to a stay-the-course
outlook. However, some early caution signs
have implications for 2H2020 and into 2021.
If, for example, CRE debt concentration con-
tinues to rise or trade tensions don’t abate,
you need to have an alternative investment
strategy at hand to change course.
GDP: Although U.S. GDP expansion
slowed from 2.5 to 3.5 percent in 2018 to 2.0
to 2.5 percent through the first three quar-
ters of 2019, it remains a story of growth
— despite the headwinds from tariffs. Addi-
tionally, the three-year trend bears out that
GDP is still expanding despite the latest
GDPNow forecast from the Atlanta and New
York Federal Reserve Board Banks (FRBs),
which suggests 4Q2019 GDP growth will
slow to less than 0.5 percent.
Employment: The three leading pri-
vate industry measures — ADP (largest pro-
cessor of payrolls for businesses in the U.S.),
PayChex (primary entity monitoring small
business labor), and LinkedIn’s Workforce
Reports — show private and small business-
es adding employment. ADP’s November
2019 report covering October data revealed:
that companies of all sizes are still adding
labor, the most coming from midsized com-
panies with 50 to less than 500 employees;
all industry sectors, except mining and man-
ufacturing (as a result of the GM strike), are
adding to payrolls; and a healthy 1.57 million
jobs have been created year-to-date, an aver-
age of 157,000 jobs per month.

Where the government and BLS are
unable to speak to wage growth, PayChex
certainly can. The company’s industry wage
report through October 2019 showed every
segment recognizing wage growth, ranging
between 1.2 percent (education) and 5 per-
cent (hospitality). The December 2019 BLS
jobs report also reported year-over-year wage
growth at 3.1 percent. All these factors — low
unemployment, more job openings than un-
employed persons, and wage growth in every
industry segment — suggest a healthy job
market heading into 2020 that will be con-
ducive to CRE growth and continued capital
investment across all property segments.
United States GDP Growth Rate
4%
3.5
3.5%
3.5
3.2
2.5
2.5%
2%
3.1
2.9
3%
2.3
2
2.2
2
2.1
1.5%
1.1
1%
Jan 2017
Jul 2017
Jan 2018
Jul 2018
Jan 2019
Jul 2019
Source: Trading Economics
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
WINTER 2020