Commercial Investment Real Estate Winter 2020 | Page 27

Consumer Optimism and Retail
Sales: The Commerce Department’s report
on October retail sales revealed a healthy rise.
Excluding automobiles, gasoline, building
materials, and food services, retail sales in-
creased 0.3 percent, resulting in a year-over-
year increase of more than 3.1 percent. This
news is consistent with earnings from larger
retailers like Walmart, which posted a 41 per-
cent increase in online sales and a 3 percent
increase in physical retail stores. With con-
sumer spending driving two-thirds of the U.S.
economy, this data indicates that no recession
is in sight from the consumer perspective.
The record $7.4 billion in sales from Black
Friday through Cyber Monday in 2019 rein-
forces the view that consumer spending is in
good health.

Small Business Activity and Opti-
mism: The National Federation for Indepen-
dent Businesses maintains the longest run-
ning comprehensive monthly survey on small
business optimism. Readings above 100 are
predictive of growth. Like consumers, small
businesses are also bullish on the economy,
with a November 2019 reading of 102.4.

Corporate Earnings: These earnings
often correlate with capex spending, hiring,
wage growth, and demand for commercial
real estate. Through mid-November 2019, 75
percent of the S&P 500 companies reported
earnings and profits beat expectations. How
are they doing it? Companies are remaking
supply chains and finding efficiencies to off-
set margin erosion from tariffs. What’s more,
REITs — a harbinger of capital flow into CRE
— have performed as well as, if not better,
than corporate earnings. Strong performance
by REITs is driving a recent wave of CRE
portfolio transactions at year-end 2019.
CHAPTER 4: COMMERCIAL REAL ESTATE
DIRECTION AND MAGNITUDE
Three CRE capital metrics that serve as the
canaries in the coal mine for investing:
1. FDIC-insured bank lending activity
and income growth;
2. CMBS loan performance and delin-
quency; and
3. Commercial property price indices.
Performance measures for FDIC-in-
sured banks (revenue growth and asset qual-
ity), CMBS permanent CRE loans (loan de-
linquency), and commercial property values
continue to improve and achieve benchmarks
not seen since before the Great Recession.
According to both Kroll Bond Rating
Agency and Trepp, YTD 2019 CMBS volume
in October surpassed the comparable figure
for 2018. October’s activity level of $12.4
billion brought YTD 2019 issuance to $70.2
billion, up 7.8 percent YOY. And the year-end
pipeline for November and December was
active with potential issuance, resulting in a
2019 figure that matches or surpasses 2018.
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A more important measure than
CMBS issuance, though, is delinquency. In
Trepp’s November CMBS Delinquencies re-
port for the January through October 2019
period, the CMBS delinquency rate fell to
another post-Great Recession low of just
2.47 percent. In comparison, the all-time
high of 10.34 percent was registered in July
2012. On a property-type level, CMBS delin-
quency is down from a year ago across all but
multifamily (up 0.19 percent). The slight in-
crease in multifamily is relatively small and
at a level below the overall delinquency rate
of 2.47 percent. Additionally, Trepp’s CMBS
delinquency data is more broadly support-
ed by the Mortgage Bankers Association’s
3Q2019 Quarterly Commercial and Multi-
family delinquency report, which shows just
45 basis points of delinquency in the banks
offer an additional 200 to 400 basis points
of yield over foreign market and asset alter-
natives. This yield differential is enough to
mitigate capital concerns over tariffs and any
potential slowing of the U.S. economy. Com-
mercial real estate in the U.S. was the place
to find an attractive yield in 2019, which is
likely to continue in 2020.
Looking at the direction of capital
flow, industrial and multifamily continue
to be the property sectors in which foreign
investors will increase their exposure. The
Association of Foreign Investment in Real
Estate 2019 International Investor Survey
notes that approximately 80 percent of in-
vestors want to increase industrial exposure
and 71 percent want to increase multifamily
exposure. As to location, four of the top five
global cities offering the most stable and
secure real estate investment opportunities
are in the U.S. — New York, Boston, Seattle,
and San Francisco. Berlin was the only city
outside the U.S. to make the top five ranking,
beating perennial favorites London, Paris,
Hong Kong, and Tokyo.
Deliquency Rate By Property Type (% 30 Days +)
Oct 19 Sep 19 Aug 19 3 Mos 6 Mos 12 Mos
Industrial 2.46 2.00 1.75 1.70 2.10 2.81
Lodging 1.49 1.47 1.54 1.80 1.55 1.98
Multifamily 2.07 2.43 2.39 2.04 1.99 1.88
Office 2.50 2.61 2.83 2.71 3.11 3.93
Retail 4.20 4.15 4.07 4.35 4.62
5.39
Source: Trepp
and 4 to 6 basis points, respectively, in Fred-
die Mac and Fannie Mae multifamily loans.
CHAPTER 5: CAPITAL IS COMING FROM
ALL DIRECTIONS
With no warning signals elsewhere, attention
now shifts to the directional influences neces-
sary to calculate the pace, magnitude, proper-
ty type, and location variables for CRE capital
vectors in 2020. In short, capital is coming
from all directions — domestic and foreign,
debt and equity. Why?
First, capital is attracted to the
growing economy in the U.S. Second, it’s a
hunt-for-yield story, with the U.S. offering
more on everything from interest rates on
government bonds to dividends on stocks
to cap rates and IRRs on commercial real
estate. Not only does the country offer a 150-
to 200-basis point government bond yield
premium over the negative-yielding debt
in Europe and Japan, but stock dividends,
REIT returns, and property valuations (as
indicated by cap rates of 4 to 6 percent) also
CHAPTER 6: FOREIGN SOURCES OF
CAPITAL INVESTMENT
The U.S. commercial mortgage holdings of
foreign-owned banks grew to $238.7 billion
by midyear 2019, up 5.5 percent from a year
earlier, according to Commercial Mortgage
Alert. In the first six months of 2019, foreign
banks’ combined portfolios of U.S. commer-
cial real estate loans increased by $8.8 billion,
or 3.8 percent from year-end 2018. That
amount exceeded the 2.7 percent growth
rate for all of 2018. In other words, foreign
banks are another CRE capital source that is
increasing lending in the U.S. There are three
likely reasons for this: global hunt-for-yield,
foreign currency exchange volatility, and risk
mitigation for fear of events like Brexit.
The figures from the top five coun-
tries suggest the CRE loan growth of for-
eign-owned institutions has outpaced CRE
loan originations by domestic U.S. banks.
Trepp data shows the 350 largest U.S. CRE
lending banks held $1.66 trillion of com-
mercial mortgages as of mid-2019, up just
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