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Smart Investing in a Mature-Cycle Environment

Feb 5, 2020

At the Q1 Los Angeles Real Estate Principals Luncheon on January 29, 2020, co-sponsored by EisnerAmper and Perkins Coie LLP and hosted at the Perkins Coie Los Angeles office, David Bitner, Head of Americas Capital Markets Research of Cushman & Wakefield, gave an insightful presentation on “Deploying Capital in a Mature-Cycle Environment.” Todd Hankin, EisnerAmper partner welcomed the attendees with some opening remarks. Here are a few key takeaways from this event.

U.S. Economy

The U.S. economy is currently experiencing its longest expansion ever. The 10-year Treasury Yield indicates global easing is still in place and there is little or no inflation. Consumer confidence, business confidence and investor confidence remain at multi-year highs. As for the labor market, there continues to be more job openings than unemployed workers. And for a bit of final encouraging news: The household debt burden is less than 10% of disposable income compared to more than 13% during the Great Recession of 2007-09.

The Next Downturn

Bitner predicts the next recession will be mild because there are fewer global imbalances than in the past. For example, southern Europe is more competitive and China is more oriented toward domestic growth drivers. Furthermore, debt levels are reduced and contained in the U.S. private sector.

We have not seen excessive supply or wage growth that would need to be corrected via a recession. This applies to both commercial and residential real estate.

Bitner also feels that the Fed is better prepared and has a more robust toolkit at its disposal to respond to a future recession, though there is theoretically less fiscal capacity.

Capital Markets

Here are a few qualitative and quantitative metrics that paint a portrait of capital markets today:

  • Transaction activity is down 1.7% in 2019 ($535B), but still the fourth highest transaction volume on record, just below 2015
  • Record mortgage origination driven by refinancing (YTD 3Q 2019: $429B)
  • Elevated liquidity across product types
  • Increasingly focused on secondary markets
  • Driven by private capital
  • Fundraising for commercial real estate (“CRE”) remains strong, especially for value-add and opportunistic funds
  • S. office yields are more attractive
  • Long-term interest rates back to 2016 levels
  • Cap rates broadly stable across markets
  • CRE returns slowing broadly: 6.4% for 2019
  • Smaller markets, better returns
  • CRE yields attractive relative to investment alternatives

Investor Implications

So what does all of this rosy talk mean to investors? Growing global wealth and real estate allocations mean that liquidity could pull back less than in the past, extending the rising tide entering new markets and product types. However, a short, shallow recession—combined with a strong monetary reaction—suggests similarly modest, short-lived corrections in asset pricing. A few noteworthy real estate subsectors include technology, logistics and workforce housing. The bottom line? Stay in the game and balance portfolios between dependable income returns and higher risk/yield investments that have a big payoff potential.

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