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Time’s Up for Non-Cooperation in CRE

Why now?

By Kevin Maggiacomo

The clock is ticking on what is a systemic issue in commercial real estate investment sales: Non-cooperation and misaligned incentives create a loophole where brokers’ interests take precedence over sellers’ interests, resulting in an environment where most sellers are selling for less than fair market value. This model and way of doing business means that money is being left on the table by brokers and, more importantly, their clients.

In this white paper, we argue that:

  • Today’s typical way of selling CRE assets is illogical and driven by misaligned incentive structures, instead of sound economic principles
  • The CRE industry urgently needs to embrace cooperation to drive shared value in the future
  • Cooperating proactively with the brokerage community is the most effective way to increase demand for CRE assets on the market
  • Savvy brokers have the chance to embrace efficient, modern, and informed ways of working to achieve the best price and the best terms for their clients. We should know — SVN has been working like this for over 36 years.

Read the full White Paper Here (click to download)

Why now?

Why now?

Despite this systemic disconnect, the CRE industry is not in bad shape, you might argue. Indeed, the real estate industry was a top three contributor to the uptick in the US’s GDP in the fourth quarter of 2021 . Why change an apparently winning formula, and why now? **

The two main reasons – that your clients will demand it and that technology will make it inevitable – are closely intertwined. While the CRE industry has been temporarily immune to this and other global trends, this won’t last forever as expectations change. The broker of the future is going to be driven by a more informed client, who is armed with real estate data that they simply didn’t have access to a decade ago. Now and moving forward, clients will have the ability to profile and understand a CRE market from 3,000 miles away, or from the other side of the planet.

The broker that doubles down on a matchmaker role is going to be usurped by the broker who understands that clients have unprecedented access to data, and what they really need is someone who can make sense of that data to drive actionable information and insights that no one else has. Meanwhile, the matchmaker role is inevitably going to be automated.

What’s more, clients intrinsically understand the power of a network. From hiring, to booking holidays, to shopping, to commuting, people tap into the networks every day. They’re not going to be convinced that a single broker’s database will magically produce the perfect buyer for their property compared with the reach of a network of brokers and their distribution channels. Furthermore, the profile of CRE buyers is changing, with more foreign direct buyers, international investors and first time CRE buyers than ever before. Clients of the future will demand broker cooperation and the generation of organized competition through fee sharing to get the best deal at the best terms for their properties.

THE BROKER OF THE FUTURE IS GOING TO BE DRIVEN BY A MORE INFORMED CLIENT

** BUREAU OF ECONOMIC ANALYSIS, US DEPARTMENT OF COMMERCE

What you need to know

The clock is ticking on what is a systemic issue in commercial real estate investment sales. Misaligned incentives create a loophole where brokers’ interests take precedence over sellers’ interests, resulting in a situation where most sellers are selling for less than fair market value. This model and way of doing business is causing sellers to leave money on the table. Savvy brokers have the chance to embrace efficient, modern, and informed ways of working to achieve the best price and the best terms for their client. We should know, as SVN was founded on the basis of these principles in 1987 and have been working like this for 36 years.

IF YOU’RE INTERESTED IN LEARNING MORE ABOUT THE POWER OF COOPERATIVE BROKERAGE, VISIT WWW.SVN.COM

Stay tuned for a new featured topic each week:

  1. The law of supply and demand
  2. Leaving money on the table
  3. The unfortunate power of misaligned incentives
  4. What does cooperation look like? & What do SVN® franchisees say about cooperation in CRE?
  5. Why now? & What you need to know

About SVN

The SVN® brand was founded in 1987 out of a desire to improve the commercial real estate industry for all stakeholders through cooperation and organized competition. SVN is now a globally recognized commercial real estate brand united by a shared vision of creating value with clients, colleagues and our communities. When you choose SVN, you mobilize the entire SVN organization of experts and all our trusted relationships to act on your behalf. This shared network is the SVN Difference. To learn more, visit our website, www.svn.com.

Time’s Up for Non-Cooperation in CRE

What does cooperation look like?

By Kevin Maggiacomo

The clock is ticking on what is a systemic issue in commercial real estate investment sales: Non-cooperation and misaligned incentives create a loophole where brokers’ interests take precedence over sellers’ interests, resulting in an environment where most sellers are selling for less than fair market value. This model and way of doing business means that money is being left on the table by brokers and, more importantly, their clients.

In this white paper, we argue that:

  • Today’s typical way of selling CRE assets is illogical and driven by misaligned incentive structures, instead of sound economic principles
  • The CRE industry urgently needs to embrace cooperation to drive shared value in the future
  • Cooperating proactively with the brokerage community is the most effective way to increase demand for CRE assets on the market
  • Savvy brokers have the chance to embrace efficient, modern, and informed ways of working to achieve the best price and the best terms for their clients. We should know — SVN has been working like this for over 36 years.

Read the full White Paper Here (click to download)

What does cooperation look like?

No doubt, when asked, some brokers will claim to cooperate with other brokers. But if this cooperation is little more than a referral fee it creates yet another misaligned incentive situation. This is because, yet again, the monetary reward does not match the amount of effort required to earn it, and brokers representing buyers are better off spending their time elsewhere, connecting their motivated buyer to a seller where the deal offers them more than 25% of the commission fee.

What does cooperation look like?

If the above scenario is not cooperation, what does true cooperation look like? In our world, cooperation is an all-in situation. It starts with an equal split of the commission between the listing broker and the buyer’s broker, but extends beyond this.

TRUE COOPERATION IN THE COMMERCIAL REAL ESTATE WORLD HAS TO BE:

1. A 50%-50% COMMISSION SPLIT BETWEEN BUY AND SELL SIDE AGENTS

2. COMPANY POLICY

3. ORGANIZATIONALLY LEVERAGED: EVERYONE HAS TO DO IT ALL THE TIME TO CREATE AN EFFICIENT MARKETPLACE

What do SVN® franchisees say about cooperation in CRE?

Our cooperative culture and business model means we can cast a much wider net and drive value. It has definitely increased our market presence and opened doors to more opportunities. This is something we embed in our team early, starting with the onboarding process, and our advisors believe in the value it creates.

Nolan Julseth-White, CCIM, Managing Director, SVN | THE EQUITY GROUP

The value of a cooperative culture and business model is invaluable! I’ve been in this industry for two years at four different firms, and I’ve had my best income producing years since we started our SVN franchise in 2018. In fact, talking about the SVN culture of collaboration at listing presentations has definitely played a part in landing listings.

Janet F. Kramer, JD, CRRP, Managing Director, SVN | INSIGHT COMMERCIAL REAL ESTATE ADVISORS

Building a business with a foundation of cooperation and collaboration strengthens relationships both within and outside the office, increasing communication and deal flow. We regularly attract dozens of offers on listed properties because the brokerage community knows there is a fair fee attached to our listings. In addition, it means we can hire top talent that is attracted to the cooperative model where they can be a part of something bigger than just themselves or their team.

Perry Laufenberg, Managing Director, SVN | DESERT COMMERCIAL ADVISORS

Stay tuned for a new featured topic each week:

  1. The law of supply and demand
  2. Leaving money on the table
  3. The unfortunate power of misaligned incentives
  4. What does cooperation look like? & What do SVN® franchisees say about cooperation in CRE?
  5. Why now? & What you need to know

About SVN

The SVN® brand was founded in 1987 out of a desire to improve the commercial real estate industry for all stakeholders through cooperation and organized competition. SVN is now a globally recognized commercial real estate brand united by a shared vision of creating value with clients, colleagues and our communities. When you choose SVN, you mobilize the entire SVN organization of experts and all our trusted relationships to act on your behalf. This shared network is the SVN Difference. To learn more, visit our website, www.svn.com.

Time’s Up for Non-Cooperation in CRE

The unfortunate power of misaligned incentives

By Kevin Maggiacomo

The clock is ticking on what is a systemic issue in commercial real estate investment sales: Non-cooperation and misaligned incentives create a loophole where brokers’ interests take precedence over sellers’ interests, resulting in an environment where most sellers are selling for less than fair market value. This model and way of doing business means that money is being left on the table by brokers and, more importantly, their clients.

In this white paper, we argue that:

  • Today’s typical way of selling CRE assets is illogical and driven by misaligned incentive structures, instead of sound economic principles
  • The CRE industry urgently needs to embrace cooperation to drive shared value in the future
  • Cooperating proactively with the brokerage community is the most effective way to increase demand for CRE assets on the market
  • Savvy brokers have the chance to embrace efficient, modern, and informed ways of working to achieve the best price and the best terms for their clients. We should know — SVN has been working like this for over 36 years.

Read the full White Paper Here (click to download)

The unfortunate power of misaligned incentives

This behavior indicates that when the principle of supply and demand meets the force of misaligned incentive structures in a commission-only environment, the latter wins out. This happens in two main ways.

WHEN THE PRINCIPLE OF SUPPLY AND DEMAND MEETS THE FORCE OF MISALIGNED INCENTIVE STRUCTURES IN A COMMISSION-ONLY ENVIRONMENT, THE LATTER WINS OUT

Incentive disconnect 1

With no base salary to fall back on, brokers need to be clever when it comes to how they spend their time. Any increase in seller price, although of great importance to the seller, only translates into an incremental increase in the money in the broker’s pocket at the end of the deal. Take a $5 million commercial sale as an example. If you assume a 4% commission, it is clear that if the listing broker hustles hard and achieves $5.5 million instead, they only gain $20,000 in additional commission. To be sure, the $480,000 added to the sale price is significant for the seller but does the slight gain in commission ($220,000 vs $200,000) make sense to a broker, who could be using that additional effort on a new deal altogether? Clearly this structure does not incentivize brokers to get the best possible deal for their seller, no matter how long it takes and how much effort is required. In other words, brokers are not motivated to drive the maximum possible demand for each property. Instead, this structure incentivizes brokers to get a good enough deal by spending the least amount of time, money and effort, and to move on quickly to the next deal. (Top tip: if you haven’t already, dig out a copy of Steven D. Levitt and Stephen J. Dubner’s book Freakonomics to read their data informed discussion about how this incentive misalignment plays out in the residential real estate market. Their final takeaway is that the data shows that real estate agents do not sell their own properties in the same way they sell clients’ properties. When it comes to their properties, they spend the time creating demand and hold out for the best deal.)

Incentive disconnect 2

No doubt, when asked, some brokers will claim to cooperate with other brokers. But if this cooperation is little more than a referral fee it creates yet another misaligned incentive situation. This is because, yet again, the monetary reward does not match the amount of effort required to earn it, and brokers representing buyers are better off spending their time elsewhere, connecting their motivated buyer to a seller where the deal offers them more than 25% of the commission fee.

 

Stay tuned for a new featured topic each week:

  1. The law of supply and demand
  2. Leaving money on the table
  3. The unfortunate power of misaligned incentives
  4. What does cooperation look like? & What do SVN® franchisees say about cooperation in CRE?
  5. Why now? & What you need to know

About SVN

The SVN® brand was founded in 1987 out of a desire to improve the commercial real estate industry for all stakeholders through cooperation and organized competition. SVN is now a globally recognized commercial real estate brand united by a shared vision of creating value with clients, colleagues and our communities. When you choose SVN, you mobilize the entire SVN organization of experts and all our trusted relationships to act on your behalf. This shared network is the SVN Difference. To learn more, visit our website, www.svn.com.

Time’s Up for Non-Cooperation in CRE

leaving money on the table

By Kevin Maggiacomo

The clock is ticking on what is a systemic issue in commercial real estate investment sales: Non-cooperation and misaligned incentives create a loophole where brokers’ interests take precedence over sellers’ interests, resulting in an environment where most sellers are selling for less than fair market value. This model and way of doing business means that money is being left on the table by brokers and, more importantly, their clients.

In this white paper, we argue that:

  • Today’s typical way of selling CRE assets is illogical and driven by misaligned incentive structures, instead of sound economic principles
  • The CRE industry urgently needs to embrace cooperation to drive shared value in the future
  • Cooperating proactively with the brokerage community is the most effective way to increase demand for CRE assets on the market
  • Savvy brokers have the chance to embrace efficient, modern, and informed ways of working to achieve the best price and the best terms for their clients. We should know — SVN has been working like this for over 36 years.

Read the full White Paper Here (click to download)

Leaving Money on the table

For the most part the CRE industry resists brokerage cooperation and fee sharing. A study we carried out spanning 10 years and 10 states showed that only one in six of the 15,000+ CRE deals surveyed was clearly cooperative*. Instead, in almost 85% of CRE transactions, listing brokers do not market to other brokers at all, miss out on all their relationships, and wind up producing the buyer on their own – referred to as a “double-ended” deal.

Indeed, today most brokers do the exact opposite of the companies mentioned earlier. Instead of tapping into the power of the network and distribution channel of the industry (i.e., the 100,000 brokers who exist within it) through cooperation, they actively work to shut this down, only exposing their sellers’ properties to a fraction of the potential buyers in the market. Looking at this through the lens of the supply and demand principle, this means that demand is reduced, sales prices are unlikely to be optimized, and will certainly not result in a fair, achievable, market rate. Undoubtedly money is being left on the table by both CRE brokers, and more importantly, their clients.

What is driving this clearly illogical behavior by the CRE industry? In an industry where you eat what you kill, surely any opportunity to drive up the sales price should be eagerly grasped? A happy seller means a long-term relationship and more deals down the line.

However, the undeniable logic of supply and demand goes head-to-head with a misaligned incentive structure. Far from ensuring that listing brokers and their sellers are on the same team, the current incentive structure puts them at loggerheads. And further, it disincentives cooperation and the ability to reach accurate, fair market prices more often and more easily, thanks to the power of the network.

MONEY IS BEING LEFT ON THE TABLE BY BOTH CRE BROKERS, AND MORE IMPORTANTLY, THEIR CLIENTS

*The 9.6% report: A report on the pricing advantage of cooperation*

Stay tuned for a new featured topic each week:

  1. The law of supply and demand
  2. Leaving money on the table
  3. The unfortunate power of misaligned incentives
  4. What does cooperation look like? & What do SVN® franchisees say about cooperation in CRE?
  5. Why now? & What you need to know

About SVN

The SVN® brand was founded in 1987 out of a desire to improve the commercial real estate industry for all stakeholders through cooperation and organized competition. SVN is now a globally recognized commercial real estate brand united by a shared vision of creating value with clients, colleagues and our communities. When you choose SVN, you mobilize the entire SVN organization of experts and all our trusted relationships to act on your behalf. This shared network is the SVN Difference. To learn more, visit our website, www.svn.com.

Time’s Up for Non-Cooperation in CRE

The Law of supply and demand

By Kevin Maggiacomo

The clock is ticking on what is a systemic issue in commercial real estate investment sales: Non-cooperation and misaligned incentives create a loophole where brokers’ interests take precedence over sellers’ interests, resulting in an environment where most sellers are selling for less than fair market value. This model and way of doing business means that money is being left on the table by brokers and, more importantly, their clients.

In this white paper, we argue that:

  • Today’s typical way of selling CRE assets is illogical and driven by misaligned incentive structures, instead of sound economic principles
  • The CRE industry urgently needs to embrace cooperation to drive shared value in the future
  • Cooperating proactively with the brokerage community is the most effective way to increase demand for CRE assets on the market
  • Savvy brokers have the chance to embrace efficient, modern, and informed ways of working to achieve the best price and the best terms for their clients. We should know — SVN has been working like this for over 36 years.

Read the full White Paper Here (click to download)

The law of supply and demand

The residential real estate industry has got this. This part of the real estate world has long embraced the notion that increased exposure to a property can boost that property’s selling price. Residential real estate brokers are comfortable with the fact that they can’t possibly know every potential buyer for every property they sell. Their response is to widen the net by cooperating with a network of brokers who have relationships with buyers. They know that this approach means shared value for everyone. This dynamic comes down to one of the essential and fundamental laws of economics: the law of supply and demand. If the demand for a product or service is driven up, higher prices will follow. Conversely, reduced or sluggish demand for something means lower prices.

AT SVN WE ARE CONVINCED THAT, JUST AS IN THE RESIDENTIAL REAL ESTATE MARKET, COOPERATING PROACTIVELY WITH THE BROKERAGE COMMUNITY IS THE MOST EFFECTIVE WAY TO INCREASE DEMAND FOR COMMERCIAL PROPERTIES FOR SALE

To carry this logic over to the real estate world, more offers on a property means a higher sales price for the seller. So far, so obvious, correct? The principle of supply and demand is something we all see playing out every day. Today, global supply chain issues are making a plethora of items scarce, driving up global competition and demand for those products and consequently resulting in higher prices. At SVN we are convinced that, just as in the residential real estate market, cooperating proactively with the brokerage community is the most effective way to increase demand for commercial properties for sale. Empirically, this plays out in practice time and again.

Stay tuned for a new featured topic each week:

  1. The law of supply and demand
  2. Leaving money on the table
  3. The unfortunate power of misaligned incentives
  4. What does cooperation look like? & What do SVN® franchisees say about cooperation in CRE?
  5. Why now? & What you need to know

About SVN

The SVN® brand was founded in 1987 out of a desire to improve the commercial real estate industry for all stakeholders through cooperation and organized competition. SVN is now a globally recognized commercial real estate brand united by a shared vision of creating value with clients, colleagues and our communities. When you choose SVN, you mobilize the entire SVN organization of experts and all our trusted relationships to act on your behalf. This shared network is the SVN Difference. To learn more, visit our website, www.svn.com.

Time’s Up for Non-Cooperation in CRE

By Kevin Maggiacomo

The clock is ticking on what is a systemic issue in commercial real estate investment sales: Non-cooperation and misaligned incentives create a loophole where brokers’ interests take precedence over sellers’ interests, resulting in an environment where most sellers are selling for less than fair market value. This model and way of doing business means that money is being left on the table by brokers and, more importantly, their clients.

In this white paper, we argue that:

  • Today’s typical way of selling CRE assets is illogical and driven by misaligned incentive structures, instead of sound economic principles
  • The CRE industry urgently needs to embrace cooperation to drive shared value in the future
  • Cooperating proactively with the brokerage community is the most effective way to increase demand for CRE assets on the market
  • Savvy brokers have the chance to embrace efficient, modern, and informed ways of working to achieve the best price and the best terms for their clients. We should know — SVN has been working like this for over 36 years.

Read the full White Paper Here (click to download)

About the author

KEVIN MAGGIACOMO PRESIDENT & CEO

Kevin Maggiacomo serves as President & Chief Executive Officer of SVN International Corp. and is responsible for the company’s mission & vision. Propelling the company’s expansion across the globe, Maggiacomo has facilitated SVN’s growth from 7 US offices in 2001, to more than 200 in 8 countries today. During his 21-year tenure, SVN has won numerous awards including being named the #1 Fastest Growing Property Management Company by MHN, twice named to Inc. Magazine’s list of the Fastest Growing Private Companies in America, acknowledged by the Lipsey Co. as one of the most recognized brands in commercial real estate, and twice ranked as a Top Impact Company by Real Leaders®. Maggiacomo has been named a 2022 Top Impact CEO by Big Path Capital and has been recognized as one of the Executives of The Year by CPExecutive.

Stay tuned for a new featured topic each week:

  1. The law of supply and demand
  2. Leaving money on the table
  3. The unfortunate power of misaligned incentives
  4. What does cooperation look like? & What do SVN® franchisees say about cooperation in CRE?
  5. Why now? & What you need to know

About SVN

The SVN® brand was founded in 1987 out of a desire to improve the commercial real estate industry for all stakeholders through cooperation and organized competition. SVN is now a globally recognized commercial real estate brand united by a shared vision of creating value with clients, colleagues and our communities. When you choose SVN, you mobilize the entire SVN organization of experts and all our trusted relationships to act on your behalf. This shared network is the SVN Difference. To learn more, visit our website, www.svn.com.

Commercial Real Estate Economic Update 5.13.22

Featured topics:

  • Consumer Price Index
  • April Jobs Report
  • Interest Rates and Yield Curves
  • EY Work Reimagined Survey
  • Commercial and Multifamily Originations
  • Evictions
  • Stock Market Volatility
  • NMHC Apartment Survey
  • NAIOP CRE Sentiment
  • NY Federal Reserve Housing Survey

Commercial Real Estate Economic Update 5.13.2022 – (Download Full PDF)

1. CONSUMER PRICE INDEX

• Consumer prices rose 8.3% year-over-year through April, according to the Bureau of Labor Statistics’ Consumer Price Index (CPI). April’s reading was the first reduction in annual inflation since August 2021, but price pressures remain near 40-year highs.

• Prices rose just 0.3% month-over-month, a modest reduction from the monthly rates registered at the start of the year and the lowest 30-day increase since September. If prices grew at this rate over the course of one year, the annual inflation rate would sit at 4.1%.

• Core CPI, which excludes food and energy prices, accelerated on a month-over-month basis, rising from 0.3% in March to 0.6% in April.

• Energy prices moderated after facing significant pressures in March. The overall energy subcomponent of CPI fell by 2.7% month-over-month, down from an increase of 11.0% in March.

2. APRIL JOBS REPORT

• Non-farm payrolls increased by 428k in April, according to the Bureau of Labor Statistics. The unemployment rate held steady at 3.6%, while the number of unemployed persons remained virtually unchanged at 5.9 million.

• Jobs in leisure and hospitality, the hardest-hit sector from the pandemic and one of the leading recovery categories, have slowed for five consecutive months. While continued gains are positive, the slowing of growth as COVID-related impacts wane may indicate a cyclical hiring peak for the sector.

• Construction added just 2k jobs in April, down significantly from 20k in March and 54k in February. The slowdown is notable given that the sector typically sees a seasonal ramp-up of hiring in the Spring. Further, the slowdown may be indicative of the qualified labor shortage the sector has faced in recent months.

3. INTEREST RATES AND YIELD CURVES

• At its May meeting, the Federal Reserve’s policy-setting committee raised interest rates by 50 basis points from a range of 0.25%-0.50% to a range of 0.75%-1.00%. The policy move was the first half percentage point hike by the Fed since 2000, and it follows its initial quarter-percent point hike in March that began the tightening cycle.

• While a Summary of Economic Projections was not released alongside the May policy meeting, forecasts tabulated by the Chicago Mercantile Exchange’s Fed Watch Tool show an average year-end projection of 2.75%-3.00% for the Federal Funds Rate.

• Yields on the 10-year Treasury pulled back to 2.84% on Thursday, May 12th, as investors continue to run for safety in bond markets given recent selloffs in stocks and little relief from this week’s inflation data. The yield on the 30-year Treasury dropped 5 bps to 2.99%.

4. EY WORK REIMAGINED SURVEY

• A new survey by Ernst & Young dives underneath the “Great Resignation” surface to detail employees’ motivations and shifting sentiments. Workplace flexibility was of particular focus, with 80% of employees indicating a desire to work from home at least two days per week and just 20% indicating a hesitance towards fully remote working.

• Notably, workers with shorter commutes are more open to working in the office. For employees with less than a 30-minute commute, roughly 40% are comfortable with a full return to the office. This drops to 25% for employees with a commute of more than 60 minutes.

• 68% of employers say that turnover has increased in the past 12 months, while 43% of employees say they will likely leave their current employer within the next year — up from just 7% in the last year’s survey. Percentages are higher for Gen-Z and millennials compared to older generations.

5. COMMERCIAL AND MULTIFAMILY ORIGINATIONS

• Originations for both Commercial and Multifamily mortgages rose by 72% in Q1 2022 compared to Q1 2021, according to recent data from the Mortgage Bankers Association.

• Loan originations fell quarter-over-quarter from Q4 2021, falling 39% but remain in line with typical seasonality trends. MBA Vice President of Commercial Real Estate Research Jamie Woodwell says that the “strong momentum in commercial and multifamily borrowing and lending at the end of 2021 carried into the first quarter,” indicative of continued strong demand for certain property types, notably Industrial and Multifamily.

• By property type, Hotel originations increased the most year-over-year, rising by 359%. Industrial increased by 145% year-over-year, while Retail climbed by 88%. Originations for Health Care properties rose by 81%, while Multifamily increased by 57%. Office dropped by 30% year-over-year. On a quarter-over-quarter basis, declines were widespread due to seasonal trends.

6. EVICTIONS

• An ongoing weekly tracker by the Cleveland Fed that has tracked eviction filings throughout the pandemic finds that evictions are falling relative to 2019 levels, particularly in places that did not have blanket eviction bans in place over the past two years.

• Between April 22nd and April 30th, the latest dates of data availability, in areas with no previous local eviction ban, evictions fell 8.6% below their 2019 comparative week benchmark.

• Almost all eviction protections have been lifted since the start of the year, and the Fed data lends support to the idea that the risk of an “avalanche” of evictions was likely overstated. Still, evidence of rising stress has surfaced in recent weeks as emergency rental assistance continues to stall and dry up, and rising rents create affordability issues.

• HUD recently announced that it would double the size of its eviction protection program, which helps tenants seek legal assistance during proceedings.

7. STOCK MARKET VOLATILITY

• Beyond recent yield curve drama in bond markets, equity markets have experienced an uptick in volatility in recent weeks as the Federal Reserve policy changes alongside rising geopolitical risks unnerve markets.

• CBOE’s Volatility Index, better known as the “VIX,” finished at 34.75 on Monday, May 9th, up from 21.16 one month earlier. The VIX typically experiences daily fluctuations but has been in a heightened state since late January, when warnings of an impending Russian invasion of Ukraine started to spook markets. Since the actual invasion has taken place, VIX has become more elevated and reacted to other uncertainty-inducing events, such as the COVID lockdowns in China and a shift in Fed policy.

8. NMHC APARTMENT SURVEY

• The NMHC’s Market Tightness Index registered an observation of 60 in the second quarter of 2022 — remaining above 50 for the fifth consecutive quarter, reflecting a still tightening market. Still, the index has now come down for three straight quarters after reaching a high watermark of 96 in Q3 2021.

• The Equity and Debt Financing Indicines dropped to 35 and 9, respectively, signaling an overall challenging capital raising environment amid rising interest rates and growing market volatility.

• When asked about to what extent respondents are worried about rising inflation and interest rates, 42% reported being “very concerned,” while 55% were “somewhat concerned.” Only 3% reported being either “not at all concerned” or unsure.

9. NAIOP CRE SENTIMENT INDEX

• NAIOP’s bi-annual CRE sentiment index remained above 50 in its April release, a sign that more favorable market conditions are expected over the next 12 months. At the same time, the index fell from 56 in its prior release (September 2021) to 53 in April, marking declining optimism.

• In a shift from the September 2021 results, most respondents expect cap rates across CRE to rise this year, reflecting the impact of rising interest rates and inflation.

• CRE professionals firmly believe that both construction materials costs and construction labor costs will rise appreciably this year. • While equity financing conditions remain slightly positive (index reading = 51), respondents are pessimistic about the availability of debt, as its index fell from 54 in September 2021 to 39 in April 2022.

10. NY FEDERAL RESERVE HOUSING SURVEY

• According to the New York Federal Reserve’s SCE Housing Survey, renters are increasingly pessimistic about their ability to buy a home in the current market environment. Only 42% of renters in the 2022 survey think they will buy a home in the next three years — down 10 percentage points from 2021.

• Contributing to the outlook are current perceptions of underwriting standards. 33.5% of renter respondents felt it would be very difficult to obtain a mortgage, while an additional 29.7% thought it would be somewhat difficult.

• Only 20.5% of renter respondents felt it would be very or somewhat easy to obtain a mortgage — a decline of 5.5 percentage points from last year.

SUMMARY OF SOURCES

• (1) https://www.bls.gov/news.release/cpi.nr0.htm

• (2) https://www.bls.gov/news.release/empsit.nr0.htm

• (3) https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20220316.pdf

https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html

• (3) https://www.cnbc.com/2022/05/12/us-bonds-treasury-yields-fall-following-hot-inflation-data. html

• (4) https://www.ey.com/en_gl/workforce/work-reimagined-survey

• (5) https://www.mba.org/news-and-research/newsroom/news/2022/05/12/commercialmultifamily-borrowing-jumped-72-percent-in-the-first-quarter-of-2022

• (6) https://www.clevelandfed.org/en/newsroom-and-events/publications/communitydevelopment-briefs/db-20200902-data-updates-measuring-evictions-during-the-covid-19-crisis.aspx

• (6) https://www.nbcnews.com/business/consumer/federal-eviction-protection-program-doublesfunding-rcna28005

• (7) https://fred.stlouisfed.org/searchresults?st=vix

• (8) https://www.nmhc.org/research-insight/quarterly-survey/2022/nmhc-quarterly-survey-ofapartment-conditions-april-2022/

• (9) https://www.naiop.org/Research-and-Publications/Sentiment-Index

• (10) https://www.newyorkfed.org/microeconomics/sce/housing#/renters_1

©2022 SVN International Corp. All Rights Reserved. SVN and the SVN COMMERCIAL REAL ESTATE ADVISORS logos are registered service marks of SVN International Corp. All SVN® offices are independently owned and operated. This is not a franchise offering. A franchise offering can only be made through a Franchise Disclosure Document.

OFFICE SPACE IN A POST PANDEMIC WORLD

SVN Now: Your Update on CRE Trends and News

“Through innovations and change, our needs for connectivity and interaction with one another haven’t changed much at all. The successful CRE Advisor of tomorrow will not forget that fact.” 

In this market update, Kevin Maggiacomo, SVN International Corp. President and CEO, focuses on office demand in a “post-pandemic” world where the workforce demands a balance between in-office connection and work from home culture.

Tune in below!

Click here to view this week’s topic: Office Space in a Post Pandemic World

Read on for the video transcript!

Speaker 1

Hello, everyone. My name is Kevin Maggiacomo, and I’m president and CEO of SBS International. As we stand here today, in the spring of 2022, let’s take a moment to reflect on what a time of transformational change we live in on a day to day basis.

So I can now go to a museum and see pagers and flip phones on display. Literally, that’s really the way that pundits have talked about the roles of physical retail and office space over the past couple of years, they will likely be forecasting that US commercial real estate sectors should start looking for their museum display cases themselves, but not so fast, as quickly as our economy and our technological tools change around us, our wants or desires or needs as people haven’t changed much at all. So call me old fashioned, or maybe just call me human. But I like being around others, down to our DNA is what makes us who we are. And that’s not going to change at any time. So let’s take a quick stock of where we are as we start to establish a post pandemic normal and focus on the place where the most intense commercial real estate space use debates are taking place, which is the office sector.

And this shouldn’t really come as a surprise to any of you the letters W, f and h are in some circles, a three letter acronym, and in others a four letter word. The last two years have prompted the honest question of whether or not we really need to be going into the office. And finally, it seems like we’re starting to get some concrete answers to that question. First companies requiring that workers be at their physical office desk, five days a week is obviously outdated. That said this doesn’t mean that the new normal should become 8:59am wake ups and a total detachment from the office. In fact, in early 2022, Pew Research Research survey 60% of the new remote workers say that they feel less connected to their co workers than they did pre pandemic when they were working in an office full time. So culture matters. And that’s a sustainable tale. For the office sector.

According to a Slack survey, 72% of workers say that they want to work some days from home and some days in the office and don’t want to be completely and physically disconnected. And so we’re starting to gain a concrete understanding of what go forward office space demand looks like, which is a physical office footprint in use case in the workplace of tomorrow. But our innovations will always be changing. They’ll change how we live our lives, sometimes little by little incrementally.

Sometimes you sort of look up, and the world that we live in is dramatically different from what it was just a few years earlier, nevertheless, through innovations and change our needs for connectivity and to interact with one another haven’t changed much at all in the successful commercial real estate of tomorrow.

We would love to discuss this with you further

Meet the whole SVN Southland team

View all current SVN Southland listings here.

View the latest SVN Economic Updates

Economic Report 5.13.2022

Economic Report 4.29.2022

 

Commercial Real Estate Economic Update 4.29.22

Featured topics:

  • GDP
  • ULI Spring Economic Forecast
  • Recession Risks
  • Apartment Sector Update
  • Office Sector Update
  • Retail Sector Update
  • Industrial Sector Update
  • Builder Confidence
  • Small Businesses Raising Prices
  • Workforce Confidence Index

Commercial Real Estate Economic Update 4.29.2022 – (Download Full PDF)

1. GDP

• Real GDP decreased by an annualized 1.4% during Q1 2022, down from Q4 2021’s revised figure of 6.9%. This is the first quarterly contraction in US economic growth since the early days of the COVID-19 pandemic in Q2 2020.

• Increased COVID-19 cases due to the Omicron variant continued to disrupt economic activity while government assistance programs, including small business loans, grants to state and local governments, and payments to households, continued to sunset.

• Decreases in motor vehicle sales and retail trade contributed the most to a broader decrease in private inventory investment. Exports declined, largely due to a decrease in sales of nondurable goods, but this was partially offset by an increase in financial serves and other business services. Imports rose over the quarter.

• Personal consumption expenditures rose, largely reflecting a rise in health care and other services, while goods registered a decline. Within goods, nondurable goods, particularly gasoline and other energy-related items, declined. On the other hand, durable goods, led by Motor Vehicles and parts, as well as nonresidential fixed investment, increased.

2. ULI SPRING ECONOMIC FORECAST

• The Urban Land Institute forecasts strong economic and employment growth through the end of the year, according to its latest Real Estate Economic Forecast.

• The report, released several days before the Bureau of Economic Analysis (BEA) Q1 2022 GDP update, predicts the economy returning to pre-pandemic growth by 2024. In their analysis, ULI notes an expectation that commercial real estate transaction volume will moderate somewhat in the coming years, declining from a record $846 billion in transactions in 2021 to $800 billion in 2022. Their forecast predicts volume to fall to $725 billion in 2023 before rising again to $750 billion in 2024.

• After experiencing price growth of 19.5% in 2021, the report projects a moderation in price increases but still with significant growth, forecasting a 10% average increase in 2022 before falling to 6.0% and 5.9% in 2023 and 2024, respectively.

• The report does not expect a significant change in vacancy rates over the forecast period due to an expectation that demand will remain strong amid historically tight inventory.

3. RECESSION RISKS

• Earlier this month, Deutsche Bank became the first major bank to forecast a coming US recession— largely based on concerns that the Federal Reserve may not be able to achieve a “soft landing” for monetary policy, potentially pushing the economy into a recession.

• Persistent inflation has forced the Fed’s hand to try and aggressively get a handle on price stability. From the view of Deutsche Bank economists, “It is now clear that price stability…is likely to only be achieved through a restrictive monetary policy stance that meaningfully dents demand.”

• Their forecast predicts a “mild” US recession that would last just a couple of quarters with the potential to push the unemployment rate up to 5%. The bank’s economists base this on a consensus that the Fed could raise its policy rate as high as 3.5% to cool price increases that they see extending into next year— a move that could deliver a blow to consumer demand.

4. APARTMENT SECTOR UPDATE

• According to Real Capital Analytics (RCA), Apartment cap rates are averaging 4.7% through Q1 2022— holding steady since Q3 2021.

• Both subsectors that RCA tracks, Garden and Mid/Highrise Apartments, saw cap rates compress over the past four quarters, declining by 29 and 26 basis points, respectively.

• Apartment transaction volumes fell to $62.96 billion in Q1 2022 after a record-breaking performance in Q4 2021, where transactions reached $161.63 billion. Still, volume is up 4.17% year-over-year.

• Apartment unit valuations through Q1 2022 are down -2.28% quarter-over-quarter but remain up by 20.33% from one year ago.

5. OFFICE SECTOR UPDATE

• According to Real Capital Analytics, Office sector cap rates have ticked up in recent months but remain near all-time lows, experiencing a slight increase from 6.2% to 6.3% in Q1 2022. Office cap rates are down by 20 bps year-over-year.

• Cap rates for Suburban Office assets compressed by 40 basis points to 6.3% between Q1 2021 and Q1 2022. Office assets in Central Business Districts (CBD) saw cap rates rise by 80 bps to 5.9% from the previous quarter and are up 60 basis points from one year ago.

• Office sector transaction volumes fell steeply in Q1 2022, declining by 37.3% to $35 billion. Both Suburban and CBD Office saw transactions fall by 35% or more.

• Office sector valuations measured on a per square foot basis remained relatively unchanged, rising from $290 per square foot to $293 per square foot from the previous quarter. They are up 43.7% year-over-year.

6. RETAIL SECTOR UPDATE

• According to Real Capital Analytics (RCA), Retail sector cap rates have remained steady over the past several quarters, charting in at 6.4% between Q3 2021 and Q1 2022. Retail cap rates are down by 20 basis points from Q1 2021.

• Retail shops saw cap rates drop by 10 basis points from the previous quarter and are down 30 basis points from one year ago. Meanwhile, retail centers saw cap rates rise by 20 basis points from the previous quarter and remain unchanged from one year ago.

• After reaching record transaction volumes (since RCA began tracking in 2001) in Q4 2021, the Retail sector saw volumes sink by 49.4% to $18.6 billion in Q1 2022. Still, retail transactions are more than double their Q1 2021 volume.

• Measured on a per square foot basis, asset prices, on average, are down by 2.0% quarter-over-quarter but remain up by 16.4% year-over-year.

7. INDUSTRIAL SECTOR UPDATE

• According to Real Capital Analytics, Industrial sector cap rates rose by 30 basis points from the previous quarter to 5.8% but just a tick up from one year ago, when cap rates stood at 5.7%.

• Flex Industrial assets have posted the largest annual cap rate rise through Q1 2022, climbing by 30 basis points from one year ago to 6.4%. Meanwhile, Single Tenant Warehouse assets have ticked up by 10 basis points from one year ago.

• After three consecutive quarterly increases, Industrial sector transaction volumes fell in Q1 2022 to $33.91 billion from $77.0 billion in Q4 2021. Still, volume is above the 22.6 billion registered in Q1 2021.

• On a per square foot basis, Industrial sector asset prices climbed by 6.5% quarter-over-quarter to $139 per square foot. Momentum in the sector has remained strong throughout the pandemic recovery, with Industrial assets prices climbing by 21.0% over the past year.

8. BUILDER CONFIDENCE

• Higher construction costs continue to take a toll on builder confidence, according to recent data by the National Association of Home Builders (NAHB)

• According to the NAHB/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly-built single-family homes dropped two points to 77 in April, its fourth consecutive monthly decline.

• The current sales conditions portion of the index fell two points to 85, while the subindex tracking the traffic of prospective buyers posted a six-point decline to 60. Sales expectations in the next six months increased three points to 73 following a 10-point drop in March.

• Builders report a drop in sales traffic and sales conditions that fell to their lowest levels since summer 2021. Driving the decline are persistent supply chain issues alongside rapidly rising interest rates while rising home prices tamper demand in entry-level markets. Mortgage rates have risen by 1.9% since the start of the year.

9. SMALL BUSINESSES RAISING PRICES

• According to a recent survey from the National Federation of Independent Businesses, roughly 40% of small businesses in the US plan to raise sales prices by 10% or more in the near future as inflation continues to rage across the economy.

• The survey, which was conducted between April 14th and April 17th among 540 small business owners, shows that over two-thirds of respondents intend to raise their prices within the next three months. Roughly half of the firms are planning increases of 4% to 9%.

• Nine-in-ten firms in the survey indicated that they’ve already had to raise prices in order to account for rising costs. 62% say that inflation is having a “substantial” impact on their business, with another third indicating a “moderate” impact. None of the respondents claimed that inflation was having “no impact.”

10. WORKFORCE CONFIDENCE INDEX

• LinkedIn’s Workforce Confidence Survey reports that so far in 2022, the cities of Nashville, Greenville (SC), and Louisville outperform all other metros in workforce optimism.

• The study, which constructs an index based on the responses of nearly 35,000 US professionals, reports that seven of the top-ten spots on their list were in the Southeastern corner of the US—another accolade of the region’s recent outsized economic performance.

• Miami and Greensboro (NC) round out the top five, followed by Salt Lake City, Seattle, Pittsburgh, Hampton Roads (VA), and the Raleigh-Durham area. Each of the top three metros registered a score of 50 and above compared to the nationwide average of 41.

• Driving the numbers are a series of factors. Nashville has benefited from a population influx alongside large investments by companies like Amazon and a booming healthcare sector. Greenville has become a growing hub for automobiles, with a large regional footprint by BMB alongside others. Louisville has benefited from a more diverse economy, with significant footprints from healthcare, manufacturing, retailing, financing, lodging, and transportation/warehousing.

SUMMARY OF SOURCES

• (1) https://www.bea.gov/news/2022/gross-domestic-product-first-quarter-2022-advance-estimate

• (2) https://americas.uli.org/spring-economic-forecast-2022/

• (3) https://www.marketwatch.com/story/first-major-wall-street-bank-to-call-for-a-recession-nowsees-clear-outside-risk-it-could-be-more-severe-11650993784

• (4) https://app.rcanalytics.com/#/trends/downloads

• (5) https://app.rcanalytics.com/#/trends/downloads

• (6) https://app.rcanalytics.com/#/trends/downloads

• (7) https://app.rcanalytics.com/#/trends/downloads

• (8) https://eyeonhousing.org/2022/04/housing-market-at-inflection-point-as-builder-confidencecontinues-to-fall/

• (9) https://assets.nfib.com/nfibcom/Inflation-Survey-FINAL.pdf

• (10) https://www.linkedin.com/pulse/feeling-good-10-us-metros-top-all-rivals-workforce-georgeanders/

©2022 SVN International Corp. All Rights Reserved. SVN and the SVN COMMERCIAL REAL ESTATE ADVISORS logos are registered service marks of SVN International Corp. All SVN® offices are independently owned and operated. This is not a franchise offering. A franchise offering can only be made through a Franchise Disclosure Document.

The SVN Difference in Focus

As a collaborative force, together we are bigger, we are more powerful and to put it simply, we secure better outcomes for our clients.

This is our SharedValueNetwork and that is the SVN Difference.

Watch to learn more.

Read on for the video transcript!

Speaker 1

Clients list with brokers who don’t cooperate. They leave money on the table. Why would anyone do that? Unfortunately, they did every day. For years, the care industry has operated with little or no brokerage cooperation, especially when it comes to fishing, making it one of the most segmented, fragmented and broken marketplaces in existence.

In approximately 85% of commercial real estate transactions. Listing brokers do not market at all to other brokers missing all those relationships. This makes zero sense considering that approximately two thirds of buyers come from out of state and more and more are coming from outside of the country. Clearly, no one broker could possibly identify every potential buyer. This independent and reckless mindset reduces competition generates fewer offers and leads to below market sale prices. While that’s great for the buyers, the sellers are paying a steep price for this dysfunction. SVN surveyed over 15,000 transactions and on average sales transactions that benefited from cooperative brokerage sold for an average of 9.6%. More. That’s like adding nearly 300,000 to a $3 million sale.

So why don’t all brokers cooperate? Because listing brokers make more money when representing both the buyer and seller. This is not the way free markets are supposed to function. At SVN. We believe that achieving the highest and best price is our clients, right? This is why we proactively promote properties and share fees equally with outside brokers. That’s not only our business model, it’s our culture. Let’s face reality, as the commercial real estate industry modernizes becoming more informed and more efficient. We need to do things differently. And at SVN, we’re leading that charge. It all comes down to our belief and the strength of working together.

As a collaborative force. We are bigger, we are more powerful. To put it simply, we secure better outcomes for our clients. This is our shared value network. Just one of the many ways that SVN advisors are accelerating innovation in proof and driving outsize success for our clients, colleagues and our communities.

Let us show you the SVN Difference.

We would love to discuss this with you further

Meet the whole SVN Southland team

View all current SVN Southland listings here.

View the latest SVN Economic Updates

Economic Report 4.15.2022

Economic Report 4.01.2022

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