Featured topics:
• Real GDP increased by an annual rate of 2.6%% in Q3 2022, according to the advanced estimate released by the Bureau of Economic Analysis (BEA). The increase follows two consecutive quarterly declines in Q1 and Q2, moderating some concerns that the US economy is already in recession.
• Increases in exports, consumer spending, government spending, and nonresidential fi xed investment drove the climb in economic output. Meanwhile, private inventory investment and residential fixed investment declined during the quarter.
• Notably, the only GDP components that changed directionality from last quarter were nonresidential fixed investment and government spending. Both went from a drag on GDP in Q2 to a driver of GDP in Q3.
• The leading driver of increased exports was industrial supplies and materials, including petroleum and other non-durables. Services also increased, mainly travel and financial services. Within consumer spending, an increase in healthcare expenditures was partially offset by a decline in motor vehicle and food and beverage spending.
• Nonresidential fixed investment, which went from negative to positive quarter-over-quarter, was driven by equipment spending and intellectual property products while partially offset by a decrease in structures.
• The mid-October release of the Federal Reserve’s Beige Book shows that economic activity expanded modestly across the nation compared to recent weeks. However, conditions varied greatly between industries and districts.
• Four of the twelve federal reserve districts reported flat activity while two noted declines—with the latter citing slowing or weak demand in the face of higher interest rates, inflation, and supply issues.
• Of the six that reported increased activity, travel and tourism rose sharply, while manufacturing activity held steady or expanded.
• Retail spending was reportedly flat across most districts as discretionary spending slowed while demand for services, specifically nonfinancial services, rose.
• Rising mortgage rates and elevated house prices continued to weaken single-family starts and sales but helped push up apartment leasing and rents.
• Commercial real estate experienced softening in both construction activity and sales as supply and labor shortages continue to slow activity, which higher borrowing costs have only exacerbated.
• Commercial real estate prices climbed by 11.1% year-over-year through September, according to the latest national all-property index released by MSCI RCA. This month’s increase was the weakest annual pace since early 2021.
• Price growth has eased in the face of rising financing costs and lower transaction activity. Transaction volume fell 21% year-over-year in the third quarter.
• Industrial retains its top spot, with prices growing 18.1% year-over-year, but saw growth dip below 20% for the first time in over a year.
• Apartments prices climbed 0.2% from August and registered a 15.9% increase year-over-year.
• Retail prices remained flat month-over-month but climbed 11.8% year-over-year through September from one year ago; still—annual growth in Retail has slowed for seven consecutive months.
• Office rates climbed 0.3% month-over-month from August and 6.8% year-over-year.
• Price growth in the six major gateway markets tracked by MSCI-RCA fell by 0.5% month-over-month and 3.7% year-over-year. Meanwhile, non-major metros climbed by 0.3% from August to September and 13.7% year-over-year.
• On-time collection rates for independently operated residential properties improved by 159 bps between September and October, rising to 81.9%, reaching a 2022 high. According to Chandan Economics’ Independent Landlord Rental Performance Report.
• October’s full payment rate is forecast to land at 92.5% by month’s end, representing a year-over-year improvement of 171 bps.
• Observing the state of Florida following the impact of Hurricane Ian, the report shows that of the preliminary estimate, 82.2% of independently operated apartments in Florida have successfully paid their October 2022 rents on time. Notably, the on-time payment rate in Florida remains above the national
average by 24 bps, despite the storm’s impact.
• Gateway markets maintained higher on-time payment rates than units located elsewhere for the tenth consecutive month. October’s on-time payment rate stands at 82.0% in Gateway units and 81.9% in non Gateway units.
• Small Multifamily rental properties (5-49 units) held the highest on-time payment rate of all sub-property types in October, coming in at 83.2%.
• Mid-priced rentals ($2,000-$2,499) continue to outperform all other price points, recording an on-time payment rate of 85.8% through October 15th— the highest mark for these (or any) rentals in 2022 to date.
• Below-expectation earnings from Prologis for the third quarter rattled its share price this week and joined some other signals of relative concern in the Industrial market.
• Several indicators, including a decline in the Philadelphia Fed’s Capital Expenditures Index and transaction data from MSCI Real Capital Analytics, indicate a decrease in buying activity within the sector, and Prologis
acknowledges that some of their customers have publicly indicated their plans to pause Capex spending.
• However, Prologis CFO Tim Arndt states several customers have indicated “an overarching need to increase space as supply chain resiliency remains a top concern.”
• Vacancy rates remain at or near all-time lows in much of the country, sitting at just 1.7% in US coastal markets. As a result, space for new facilities has become increasingly scarce.
• According to statements by the company, although large customers like Amazon have slowed their buying pace, potentially due to overbuying in previous quarters, they have not given up on previously
acquired space.
• Occupancy in Student Housing stands at 96.6%, with assets seeing 4.1% year-over-year rent growth, according to the Fall 2022 Report Card by Yardi Matrix.
• The report card tracks housing units across 200 universities and found that preleasing had accelerated faster at schools with higher levels of selectivity and enrollment. Still, schools across the board saw an improvement in occupancy and incomes.
• 12 of 200 universities experienced double-digit growth in preleasing through September 2022 compared to one year before. Washington State University and the University of Houston topped the list, climbing by 18.9% and 16.4%, respectively.
• While enrollment nationwide remains below peak, the number of universities returning to full capacity climbed dramatically in the past year.
• VTS’ latest office demand index (VODI) increased in September, joining several other metrics signaling an uptick in office activity following the Labor Day holiday.
• The VODI ticked up from an index reading of 46 to 48 in September. The index level indicates the percentage of office demand relative to a pre-pandemic benchmark.
• Similarly, weekly data by Kastle Data systems shows that most offi ce tenants have returned to the office at least part-time. However, overall daily activity remains down by half of 2019 levels.
• Notably, after sharp declines throughout the summer, New York City offi ce activity has returned to 52 of pre-pandemic levels.
• The VODI remains down 23.3% quarter-over-quarter and 33.3% year-over-year, though the annual comparison is partially due to base effects from a post-vaccine office push in Mid-2021.
• Existing home sales fell by a seasonally adjusted -1.5% month-over-month, its eighth consecutive month of decline as rising interest rates slow homebuying demand.
• Three of the four major regions of the US saw monthly declines, while the West region saw transactions hold steady. First-time buyers accounted for 29% of all home sales in September, holding relatively steady
from previous months.
• Despite the weaker number of total sales, more than 25% of homes are selling above their listing price due to “limited inventory,” according to NAR Chief Economist Lawrence Yun. The median sales price for an existing home rose to $384,800, up 8.4% from one year ago.
• Utilizing data from Realtor.com’s Market Trends Report, the metros with the largest increases in list price growth were Miami (+28.3%), Memphis (+27.3%), and Milwaukee (+27.0%). Phoenix registered the highest
increase in the percentage of homes that had prices reduced compared to one year ago (+32.3%), followed by Austin (+27.4%) and Las Vegas (+20.0%).
• According to a recent analysis by Trepp, sublease availability has been growing in smaller US cities over the past many months. In light of declining needs for office space among some of the nation’s largest employers, several have taken to subleasing to reduce their footprints and costs.
• Trepp’s analysis suggests an inverse relationship between subleasing activity and multifamily rent growth. Metro areas with high living costs, where many residents were lost during the pandemic, generally see higher rates of subleasing activity, notably Los Angeles and Minneapolis. Atlanta is a notable exception,
maintaining strong subleasing activity while having more robust multifamily growth relative to other large metros.
• Several firms in California, including Meta, Verizon, and 8×8, have or are implementing plans to sublease their office spaces. The trend also appears to be developing in the life sciences space, with Biogen subletting some 18,000 square feet of space in Cambridge, MA.
• According to the latest release by the Conference Board, consumer confidence decreased in October following consecutive increases in August and September.
• The overall index fell from a reading of 107.8 in September to 102.5 in October, while the “present situation” sub-index, which attempts to reduce the respondents’ inclusion of future expectations, fell even sharper.
• According to the Conference Board’s analysis of the report, infl ation concerns ticked up again in September after several months of gradual reduction. The trend is likely connected to the subsequent gasoline and
food prices acceleration over the same period.
• Respondents’ vacation plans were also reduced, though interestingly, intentions to purchase a home, an automobile, and other high-priced items rose despite upward pressure on borrowing rates.
• The expectations index declined more modestly than the present situation index but remained close to a reading of 80, a level that the index associated with a recession signal.
Featured topics:
• On September 21st, the FOMC voted to increase the Federal Funds Rate by 75 bps for third consecutive time to fight persistent US inflation. The current Federal Funds Target Rate sits at 3.00%-3.25%—its highest level since January 2008.
• Stocks reacted negatively to the news, with the Dow closing 1.7% lower than it started on Thursday, while the Nasdaq Composite fell 1.79%.
• In its summary of economic projections, the committee forecasted a half-percentage point rise in unemployment and an effective federal funds rate of 4.6% by the end of 2023.
• Notably, central banks across Asia and Europe followed suit on September 22nd with their own string of rate hikes, a signal that global monetary policy is coalescing to tackle what is a global phenomenon.
• The Federal Reserve’s latest summary of economic projections, released alongside the September policy meetings, reflected a consensus forecast of slowing growth, higher inflation, and a limited increase in unemployment by the end of 2022.
• The average forecast for the annual change in GDP through Q4 2022 fell to a dismal 0.2% in their September projection, a drop from the 1.7% growth forecast in June.
• The Fed also projects that, as a result of higher rates and slowing growth, the unemployment rate will rise to 3.8% by year’s end, but this is just ten bps above their June forecast.
• Both headline and core inflation are expected to remain above the FOMC’s 2.0% target as we turn the page to 2023. The median forecast for headline PCE was 5.4% in the September projections, up from a forecasted 4.2% in June, signaling that the Fed believes that more aggressive action is needed to fight inflation compared to what they thought was required just a few months ago. The median core-PCE projection, which removes food and energy costs, rose to 4.5% from 4.3% in June.
• CommercialEdge’s latest National Office Report, released in September 2022, shows that Life Sciences is increasingly driving office demand even as office vacancies continue to climb.
• 21.6 million square feet of lab space is currently in development nationally, with the largest projects in Boston, San Diego, and San Francisco. Moreover, the average Life Science facility sits at $645 per square foot, significantly above the average of $258 per square foot for general office buildings.
• Large projects planned in Boulder County, Colorado, and Phoenix also signal that the trend has stretched beyond the typical hubs for the sector and into more tertiary markets.
• According to BLS data, as of 2021, employment in life science related positions is highest in Boston (23,900), New York (18,100), and San Francisco (14,200), as defined by CommercialEdge’s scope of the industry.
• Property tracking by Zumper shows that the median apartment rent has decreased for the first time in almost two years, with more than half of the markets tracked by the firm showing month-over-month declines in the average one-bedroom rent.
• Zumper’s findings are supported by recent data from CoStar and RealPage, which show a ten bps decline in apartment asking rents nationally between July and August (CoStar) and a 0.4% increase in samestore asking rents for new leases between July and August (RealPage).
• Some large metros are bucking this trend; however, low supply in some markets amid high demand has limited the flexibility of rent prices. In Seattle, the median one-bedroom is $2,040, up 20.7% year-overyear and 2.0% month-over-month, according to RealPage. Rents in New York City also continue to reach new highs.
• Minneapolis, Nashville, Tampa, Orlando, Jacksonville, and El Paso saw declines in asking rents in August.
• Market watchers have long signaled that September would be a telling month for the health of the US office sector. With children returning to schools without the overhanging threat of possible shutdowns and prolonged periods of remote learning, employers are making bigger pushes to get workers back at their desks.
• According to Kastle System’s “Back to Work Barometer,” physical office occupancy across the 10 US cities averaged 47.5% of its pre-pandemic benchmark in the week of September 14th. While these data indicate that physical office occupancy remains less than hallway towards a full recovery, they nonetheless represent the highest occupancy rates since March 2020.
• Average office physical occupancy rates jumped by a sizable 4.1% across the top 10 markets, reflecting the impact of children starting their school year. New York saw the largest one-week increase, with occupancy rates rising by an encouraging 8.7%. Meanwhile, Austin holds the title as the most recovered office market to-date, with physical occupancy rates rising to 60.5% of their pre-pandemic benchmark.
• The on-time collection rate for independently operated residential properties fell by 55 bps between August and September, landing at 81.1%, according to the latest Independent Landlord Rental Performance Report by Chandan Economics.
• Gateway markets have maintained higher on-time payment rates than units located elsewhere for nine consecutive months through July 2022, though the gap has been narrowing over the previous three months. The September on-time rate for Gateway markets stands at 82.3%, while non-gateway markets registered an on-time rate of 81.2%.
• Analyzing performance trends at different rental price points, units with monthly rents below $1,000 continue to register the lowest average on-time payment rate through September 2022, coming in at 79.6%. Mid-priced rental units perform the strongest, with a September on-time payment rate of 85.4%. High-priced rentals, defined as those charging more than $2,500 sit in the middle, with an on-time payment rate of 84.4% in September.
• 2-4 Family rentals maintained the highest on-time payment rate of all sub-property types for the sixth consecutive month, arriving at 83.2%.
• A new paper by the San Francisco Fed analyzes the relationship between the uptick in remote work and housing demand and found that the shift to remote work may account for more than half of overall homeprice increases between November 2019 and November 2021.
• The share of work done from home, either full or hybrid, has stabilized around 30% as of August 2022, up from 5% in 2019 and 60% in Spring 2020. Still, levels differ significantly across metros, and data shows that cities with more remote work before the pandemic saw larger increases in remote work during the pandemic.
• Breaking cities down into tiers, based on their level of remote work, price growth was essentially uniform across all tiers before the pandemic. However, by late 2020, cities with a higher share of remote work saw significantly higher home price increases than those with less, with the divergence expanding in 2021.
• Despite rising economic headwinds and growing recessionary concerns, the US labor market remains exceptionally tight, with nearly two job openings available for every one person looking for work. A significant reason why demand for labor is outpacing supply is that less Americans are participating in the labor force. While the labor force participation rate has risen by 0.7 percentage points in the past year, it remains down by another 1.0 percentage points from where it entered the pandemic.
• A recent Chandan Economics analysis of the Census Bureau’s August 2022 Current Population Survey explored the reasons why out-of-work Americans are choosing not to look for jobs. According to the f indings, two factors are keeping a growing number of people out of the job market: family responsibilities and schooling/training.
• Family responsibilities was the primary reason why 18.8% of out-of-work Americans had not looked for new employment in recent weeks— up from just 12.1% in 2020. The uptick is likely due to a surge in family formations following the initial stages of the pandemic.
• Similarly, 15.1% gave the reason of attending school or enrolling in a training— up from 8.8% two years ago.
• Commercial real estate prices climbed by 14.0% year-over-year through August, according to the latest national all-property index released by MSCI RCA. This month’s increase was the slowest annual pace of 2022, while the index rose just 40 basis points month-over-month.
• Each of the four major sectors saw modest price growth deceleration in August. Industrial retains its top spot, with prices growing 24.7% year-over-year. Industrial also charted the most significant monthly increase, climbing by 1.5%.
• The Apartment index rose 17.1% year-over-year but experienced its sixth consecutive month of slowing growth. Apartment prices climbed by ten bps between July and August.
• The Retail index rose 16.0% year-over-year but, like Apartments, saw its sixth consecutive month of slowing growth. Retail prices are up 80 bps from July.
• Suburban Office posted a 6.6% year-over-year increase and saw its fourth consecutive month of slowing price growth. The CBD Office index rose 7.7% year-over-year and ten bps between July and August.
• Price growth in Gateway markets climbed 7.6% year-over-year while price growth in non-major metros rose by 16.3% year-over-year.
• According to the New York Federal Reserve’s Global Supply Chain Pressure Index, supply chain conditions have made significant progress towards normalization in recent months, though they are still far from pre-pandemic normality.
• Supply chain disruptions have proven a significant contributor to inflation both in the US and around the world over the past year, as consumer demand has exceeded the capacity of supply lines to keep up.
• The index has a historical average value of zero, with each monthly observation represented as standard deviation from the mean. August 2022’s index value was a 1.47. Before the pandemic, the index had never fallen below -1.57 or risen above 1.56, indicating that today’s conditions still reflect abnormally stressed supply chain conditions.
• Nonetheless, the index has improved considerably in 2022. After reaching an all-time high is December 2021 (4.31), the Supply Chain Pressure Index has fallen in six of the past eight months.
SUMMARY OF SOURCES
Table of Contents:
Through July, measured by MSCI RCA’s Commercial Property Price Index (CPPI), commercial real estate prices have risen by 16.8% from one year ago. The latest figures are just a tad under the record 19.9% pace that was registered earlier this year and reflect an industry that continues to be a bright spot amid a storm of economic headwinds. Properties that are located both inside and outside of gateway metros have moderately slowed in recent months but have shown the ability absorb the early effects of monetary tightening, climbing by 8.9 % and 19.3% year-over-year, respectively, through July.
Growth in gateway markets have consistently trailed non-gateway metros throughout the pandemic recovery, as corporate America inched its way into a new normal within larger cities. Somewhat surprisingly, the divergence only intensified as the United States moved beyond COVID-era policies and activity restrictions.
The growth spread between non-gateway metros and the top six major metros was relatively unchanged between December 2020 and July 2021 but began to balloon as the Delta variant took hold in the Fall. As Delta subsided to start 2022, inflation in the US intensified, with non-major metros experiencing a higher degree of cost increases relative to larger cities. So-to did the growth spread between gateway and non-gateway metros, which swelled to 10.43% through July 2022 — more than double its growth spread from one year ago.
The variation between gateway and non-gateway inflation rates likely explains a significant part of why we are seeing a similar pattern among commercial real estate price growth.
The Apartment market continues to be a stalwart not only for commercial real estate, but for the US economy at large. According to MSCI RCA, Apartment transactions rose by $18 Billion from Q1 to Q2 2022, a 26% increase quarter-over-quarter and up 42% from one year ago.
While transaction volume in the sector has receded from the record highs achieved in 2021, it continues to benefit from robust housing demand amid increasingly limited supply. If Apartment sector volume were to continue its pace set during the first half of this year, it would amount to more than $309 billion in sales, second only to 2021’s record level.
Through Q2 2022, unit prices are up 25.6% year-over-year — an all-time high for the sector. Amid rising prices and increased buyer activity, cap rates have continued to fall to new lows, dropping 10 bps to 4.3% in Q2. Between 2011 and 2019, a rough approximation for the last real estate cycle, cap rates fell an average of 17 basis points annually. According to the latest data, cap rates are down by a weighty half-percentage point from one year ago.
Transaction volume in the Office sector continues to trail pre-pandemic levels as remote work gains what signals to be a permanent foothold in the US labor market. Through the second quarter of the year, MSCI Real Capital Analytics has tracked $57.7 billion worth of Office sales, an improvement from the same period in 2021, but roughly $10 billion below the first-half 2019 pace.
Projecting out the half-year data over the rest of 2022, the annualized total of $115.4 billion would amount to just 80% of both 2021 and 2019 volumes. However, it is worth noting that transaction volumes across most property types tend to peak in the fourth quarter — in the five years before COVID, CRE transaction volume was 22% higher on average during the second half of the year compared to the first. The seasonality was exacerbated in Q4 2021 as inventors readied for the impending Fed tightening cycle — Office sector transactions achieved near record-volume in Q4 2021 ($56.6 billion). The trend suggests that 2022’s first-half improvement over last year may be a more reliable signal than the annualized projection. Still, as 2021 ended, Office investors still largely anticipated a normalization of attendance levels as pandemic-era activity patterns waned. So far in 2022, all evidence has pointed to the contrary, and Office transaction volumes are likely to stall in the fourth quarter of 2022 compared to previous years as a result.
Entering the pandemic, office space on average was transacting at $238 per square foot. Pricing fell to a low of $235 per square foot between Q2 and Q4 2020 and has since rebounded to new highs — reaching $278 per square foot in Q2 2022. As of Q2 2022, office space is transacting at an average of $289 per square foot, up 13.3% year-over-year and 2.2% quarter-over-quarter. Cap rates on Office properties continue to reach historical lows, falling to 6.0% in Q2 2022. Over the past year, cap rate compression in suburban offices has driven much of the reduction in the broader sector.
The Retail sector has shaken off early pandemic headwinds, registering its highest first-half of the year transaction volume since 2015. Further, through the second quarter of 2022, Retail led all sectors with a 46% year-over-year increase in deal volume. Notably, compared to other CRE types and their sub-sectors, Retail has experienced the largest variation in sales growth between its two sub-sectors over the past 12 months. Transaction volume at shopping centers rose 186% year-over-year through Q2 2022, while shop sales rose just 52%.
Though annual growth has fallen below the triple-digit increases seen throughout 2021, much of last year’s high marks were due to base-effects stemming from an anemic market in 2020. If Retail volume was to continue at its current pace for the remainder of the year, it would set a record $89.2 billion in transaction volume. Considering that this projection does not factor in the typical volume uptick during the fourth quarter, Retail is poised have a banner year in 2022, all else held constant.
Retail cap rates ticked down 10 bps quarter-over-quarter to a new all-time low of 6.0% in Q2 2022. While cap rates in the sector held relatively steady throughout much of the pandemic, they have fallen by 40 basis points over the past year as property values have risen more rapidly than rents. Retail price per square foot reached $313 in the second quarter, the highest mark on record. Moreover, the price per square foot for transacted Retail assets has risen on a year-over-year basis for five consecutive quarters. Prior to the recent string of price growth, annual pricing had declined for four consecutive quarters. Through Q2 2022, Retail price per square is up 24.9% year-over-year, the fastest annual pace on record.
The Industrial sector has seemingly had the wind at its back ever since the end of the Great Recession, and this was only intensified by the positive shift in goods consumption that we saw take place during the pandemic. Through the halfway mark in 2022, sector growth remains as strong as ever. According to MSCI Real Capital Analytics, $74.9 billion of Industrial asset sales have changed hands through the first two quarters of 2022, amounting to 134% of 2021’s first-half volume. Annualizing the first two-quarters of sales suggests that the sector is on pace to hit $149.2 billion worth of transaction volume by the end of the year.
Like the pattern evident across all CRE sub-sectors, Industrial transaction volumes could accelerate during the second half of the year. For instance, in Q4 2021 Industrial transaction volume totaled a massive $77.3 billion, roughly $20 billion more than the first two quarters of 2021 combined. While last year’s market was partially fueled by monetary policy tea leaves, if Industrial experiences an uptick in Q4 2022 that is anywhere close to what we saw last year, the sector will set an annual total that is well ahead of what it has to date.
Like all other sectors, cap rates for the Industrial sector continue to chart new lows, falling 10 bps quarter-over-quarter and 40 bps year-over-year. On the other hand, asset pricing continues to reach record highs both in terms of observed levels and annual growth rates. As of Q2 2022, Industrial assets are trading at an average of $175 per square foot, rising $8 from the previous quarter and $32 from one year ago. Through the second quarter, asset price growth in the sector has achieved a new record high of 32.0% year-over-year first achieved in Q1.
The US economy is sending mixed signals, to say the least. Inflation continues to sit near generational highs, with the Consumer Price Index (CPI) climbing by 8.5% over the previous 12 months through July. A flattening of headline CPI between June and July has escalated hopes that the Federal Reserve’s monetary tightening may be having an impact on price pressures. Still, Fed Chair Jerome Powell along with several other FOMC voting members have indicated in recent statements a willingness to push ahead with hikes until the economy has achieved a sustained reduction in price growth.
The feared double-edged sword of rising rates has indeed begun to poke out in both directions. Real GDP declined by an annualized 0.6% in Q2 2022, according to the latest estimate released by the Bureau of Economic Analysis (BEA) in August, the second consecutive quarterly reduction. A fall in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment over the quarter fueled the decline. Notwithstanding, consumer spending remains robust while US exports increased in the second quarter. That sustained economic activity is evident in the continued strength of the labor market, which added 528,000 jobs in July as the unemployment rate ticked down to 3.5%.
Whereas in 2020 and 2021, commercial real estate success was propelled by unprecedented economic stimulus followed by a momentous reopening of the economy, it is now being fueled both by late-cycle demand and the cascading of costs related to supply shortages. The above can be inferred because, while each major sector beside Office saw annual transaction volume climb through Q2 2022, all four sectors saw a decline in the numbers of properties transacted. Builders have sounded the alarm for months on the challenges brought by labor and materials shortages that are hampering their ability to complete new projects. These added costs amid the backdrop of sustained demand are adding significant value to assets.
Each sector of CRE will have its own key factors to lookout for as we progress through the second half of 2022. Apartment assets should continue to benefit from consumers trickling out of the home-buying market and into the rental market. New home sales fell sharply in July, down -12.6% month-over-month and -29.6% year-over year. Much of the would-be housing demand will overflow into apartments, but tenant affordability concerns will likely intensify. The fate of Industrial assets will largely depend on Retail inventory volume in the coming months. Retail inventories excluding autos increased by 1.5% in July, according to the Census Bureau, as pent-up orders from earlier in the year get stocked away. However, many Retail market watchers expect record discounting this holiday season as firms look to reduce inventory — an important signal to keep an eye on.
Office appears to be settling into a new post-COVID equilibrium, but one where quality, accessibility, and amenities are arising as key differentiators for space demand relative to centrality. Retail has enjoyed a size-able rebound so far this year, and where consumer spending evolves from now will be a key barometer for the look ahead. While many consumers remain skittish about inflation and are enduring tough spending decisions in each paycheck, consumer sentiment has begun to rebound from its historic low reached in June.
Even with a few traffic jams along the way, commercial real estate and the US economy as a whole are still moving forward with pace.
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Featured topics:
• Fed Futures markets are now firmly predicting another 75-bps hike at the FOMC’s September meeting based on estimates from the Chicago Mercantile Exchange.
•Following the committee’s July meeting, future markets were initially forecasting a more moderate increase of 50 bps come the September meeting, as seen in May and June before the Fed turned up the heat. As of September 8th, 86.0% of the Fed Futures market forecasts a 75-bps hike at the Fed’s next meeting on September 20th-21st.
• Since late July, markets have digested several key data points, including above-expectations job growth, a rebound in consumer sentiment, and a modest but unconvincing decline in year-over-year inflation. During recent talks at the annual Jackson Hole Summit, Fed officials also maintained a relatively hawkish tone, signaling a sustained willingness to raise rates to tackle inflation.
• The September 7th version of the Federal Reserve’s Beige Book shows that economic activity remains relatively unchanged across the nation compared to recent weeks, with most businesses reporting steady or growing activity.
• Most federal reserve districts reported steady consumer spending levels, but purchases are moving away from discretionary items and toward food and other essentials, and inflation pressures mount. Auto sales continued to be hampered by low inventory and high prices, while hospitality and leisure remained relatively strong throughout the summer.
• Commercial real estate experienced softened activity, particularly for office space. Loan demand was reportedly mixed with solid demand for credit cards and commercial and industrial loans, while residential (buying) demand continued to weaken in the face of rising mortgage rates.
• CMBS delinquencies registered a slight decline in August, falling eight bps to 2.93%, according to Trepp— it is the first time delinquencies have fallen below 3% since the COVID-19 pandemic began.
• Delinquencies have steadily declined over the past two years as most Commercial Real Estate segments recovered, but recent improvements in the Hotel and Retail sectors have fueled the latest reductions.
• August represents the 24th decline in CMBS delinquencies in the past 26 months. Industrial continues to boast the lowest delinquency rate of 0.51% through August. Multifamily follows close behind with a rate of 0.95%. The rate for Office stands at 1.5%, Lodging (Hotel) at 5.18%, and Retail at 6.45%.
• A new report by Trepp looks at the rise in Single-Family Rental CMBS issuance in recent years, as the sector has risen from just 7.22% of all CMBS issuance in 2018 to 13.92% so far in 2022.
• According to the analysis, $73.53 billion of Single-Family Rental CMBS has been issued since 2013, dominated mainly by players such as Progressive Residential, CoreVest American Finance, Invitation Homes, and Tricon, which accounted for more than half of all SFR issuance. SFR issuance in 2021 was more than double its 2019 level.
• While it appears that SFR will remain a notable portion of the CMBS market for years to come, the sector has seen a similar slowdown in recent months as seen in the broader CMBS market. Trepp notes that a total of five new deals so far in Q3 totaled $2.11 billion, on pace to fall below the $7 billion total hit in Q2.
• The on-time collection rate for independently operated residential properties fell by 55 bps between July and August, landing at 79.7%, according to the latest Independent Landlord Rental Performance Report by Chandan Economics.
• Gateway markets have maintained higher on-time payment rates than units located elsewhere for eight consecutive months through August 2022. Measured month-over-month, gateway market on-time collection rates rose by 16 bps but are down 211 bps year-over-year. The July on-time rate for Gateway markets stands at 81.4%, while non-gateway markets registered an on-time rate of 79.5%.
• Sun Belt rentals have underperformed the rest of the US for five consecutive months, standing at 78.4% in August compared to 80.3% for non-sun belt rentals. The Sun Belt’s growing success has seen some affordability issues arise, as markets re-price more quickly than some existing residents can handle.
• 2-4 Family rentals maintained the highest on-time payment rate of all sub-property types in August, rising 52 bps month-over-month.
• Despite growing recession concerns over the summer, consumer sentiment appears to have stabilized. The University of Michigan’s final August Consumer Sentiment estimate was revised up from 55.1 to 58.2. Moreover, consumer expectations saw a significant revision from a previously estimated 47.3 to a final reading of 58.0.
• The Consumer Sentiment Index has risen from its all-time low level of 50.0 in June, climbing in consecutive months. The upswing has been widespread across most demographics, though lower-income consumers’ sentiment has risen higher in recent readings, even exceeding that of higher-income consumers, bucking the historical trend.
• Inflation expectations have also receded, falling from 5.3% in July to 4.8% in August.
• The US econom y added 315,000 jobs in July while the unemployment rate rose slightly to 3.7%, according to the Bureau of Labor Statistics.
• This month’s jobs report fell slightly below expectations and signaled a slight loosening in the labor market. Still, job-adds continue to be strong, notably in professional and business services, health care, and retail trade.
• The uptick in the unemployment rate primarily reflects the reentry of some workers into the labor force, as the US labor force participation rose to 62.4%. Average hourly wages also climbed, increasing 5.2% year-over-year.
• Professional business services employment climbed the most during the month (+68,000), followed by healthcare (48,000) and retail trade (44,000). Meanwhile, leisure and hospitality job gains receded from their recently typical high levels, remaining relatively unchanged from July.
• Year-over-year foot traffic to indoor malls, open-air lifestyle centers, and outline centers declined during the month. Indoor malls saw the steepest fall from the month before, falling by 1.1% month-over-month.
• Despite the declines, their shallow nature presents a dose of optimism for brick-and-mortar businesses in the face of recent economic headwinds. According to the Placer.ai report, all three segments of the mall sector ended August more strongly than they began, with indoor malls and open-air centers posting their most significant week-over-week gain since June 27th. Moreover, Retail REIT Simon Property Group recently reported strong occupancy and leasing volume, showing a 26% year-over-year increase in sales per square foot through the second quarter of 2022.
• S&P Global’s US Manufacturing Index declined to its slowest growth rate since July 2020 during August, registering a reading of 51.5. An index reading above 50 indicates growing activity in the sector, while a reading below 50 indicates declining activity.
• New orders reportedly fell for the third consecutive month amid weak client demand caused by high inflation and rising economic uncertainty. Output also contracted for the second consecutive month.
• On the flip side, supply chain disruptions are reportedly the least severe that they have been since October 2020, while input price inflation was its slowest since January 2021.
• In the second quarter of 2022, acquisition, development, and construction (AD&C) loan volume reached its highest level since the Great Financial Crisis, according to an analysis by the National Association of Home Builders (NAHB).
• However, pushing up volume levels is a rise in loan balances stemming from homes remaining in inventory for longer as homebuying slows, filtering into a slowdown in home-building activity.
• Balances are expected to decrease in the coming months as rising borrowing costs slow the rate of new borrowing. According to NAHB’s latest survey on AD&C financing conducted in August, the average effective rate on AD&C loans rose across all loan types between Q1 and Q2. The rate on Land acquisition loans rose from 6.32% to 8.19 quarter-over-quarter. Land development loans saw rates climb from 7.85% to 9.55%. Speculative single-family loans saw rates rise from 7.38% to 8.48, while pre-sold single-family loan rates rose from 7.90% to 8.63%
SUMMARY OF SOURCES
(2) https://www.federalreserve.gov/monetarypolicy/beigebook202209.htm
(6)http://www.sca.isr.umich.edu/
(7) https://www.bls.gov/news.release/empsit.nr0.htm
(8) https://www.globest.com/2022/09/08/mall-visits-slump-as-inflation-heats-up/
(9) https://tradingeconomics.com/united-states/manufacturing-pmi
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Commercial Real Estate Economic Update 8.26.2022 – (Download Full PDF)
• Real gross domestic product (GDP) decreased at an annual rate of 0.6 percent in the second quarter of 2022, according to the BEA’s second estimate released on August 25th. The revision shows that the US economy contracted less than expected, though directionality suggests that we are in a technical recession. Real GDP fell 1.6% in the first quarter.
• The latest update revises up both consumer spending and private inventory investment , the latter which led to overall declines in the second quarter. Consumer spending remained the strongest contributor to growth. On the flip side, there was a downward revision in residential fixed investment, which was also one of the leading categories of decline in the second quarter.
• The most significant contributors to the economic contraction were pullbacks in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment. Meanwhile, exports and consumption increased, leading all positive contributions to the index.
• According to the Real Estate Round Table’s Q3, 2022 Sentiment Index, commercial real estate executives are pessimistic about the sector’s current state, though optimism remains on the horizon.
• The overall index, which included both current and future conditions, fell from 51 in Q2 2022 to 44 in Q3 2022 (note: above 50 = positive conditions). The overall index is down by 34 points compared to one year ago.
• The overall index decline was entirely due to reductions in the “current conditions” sub-index, which registered a Q3 observation of just 38— its lowest reading since 2020. Among the reasons cited for the decline, inflation, supply chain disruptions, and the impact of rising interest rates all topped the list.
• Optimism for future conditions rebounded in Q3 2022, registering a reading of 51. It was the first time since early 2021 that the future conditions sub-index rose quarter-over-quarter.
• Commercial real estate prices climbed by 16.8% year-over-year through July, according to the latest data from MSCI RCA’s All-Property index. The index rose by 0.9% month-over-month.
• July’s pace of growth remained strong but was the second consecutive month where growth decelerated. Annual growth in commercial real estate properties reached a record 19.5% year-over-year in May.
• Industrial continued to outpace all other property types in quarterly and annual growth rates, climbing by 1.2% and 24.4%, respectively. July marked the tenth consecutive month of above-20% year-over-year growth for the sector; however, it is down from the nearly 27% annual growth registered earlier this year.
• Apartments registered the second highest annual growth in July but slipped from the previous month, falling to 20.9.
• Annual growth in Retail climbed 17.7%, down 1.0% from June but still significantly above its historical average.
• Suburban office slowed to 7.8% year-over-year, while CBD office also slowed to 7.7%.
• According to the latest industrial space demand report from NAIOP, retailers and logistics firms have begun to slow the rate at which they acquire new industrial space.
• Net absorption of industrial space fell sharply to 151.2 million square feet in the first two quarters of 2022, down from 2021’s record pace but still relatively higher than prior years. NAIOP forecasters expect the market to cool further and revert to pre-pandemic levels by 2023.
• The combining factors of falling pressure on supply chains, increased inventory carrying costs, an economic contraction, and slowing e-commerce expansion contribute to the fall in demand. According to the NY Fed’s Supply Chain Pressure Index, supply chain congestion eased during the year’s first half, resulting in retailers buying up less space than in recent quarters.
• New single-family home sales fell sharply in July, down -12.6% month-over-month and -29.6% year-overyear.
• The median sales price on a new home was $439,400, up from $402,400 in June.
• Just 511,000 homes were sold in July, down from 585,00 in June and 726,000 one year ago. July’s volume is the lowest monthly sales total since January 2016.
• The continued decline of new residential sales indicates rising mortgage rates and other cost pressures are affecting would-be homebuyers despite robust overall housing demand. The average rate on a 30- year mortgage never dropped below 5% during the month and is at least 2% higher than any rate made available in January of this year.
• Builders are also reporting continued construction woes, adding additional pressure to prices. While some expect a correction in pricing, most economists predict that it will be far from the drastic pullbacks seen during the housing crash of 2008 as today’s economy continues to be supported by both strong job growth and housing demand, which was not a feature of the previous downturn.
The Federal Reserve’s July Senior Loan Officer Opinion Survey, conducted over the second quarter of 2022, signals that lenders continue to tighten underwriting standards across all cross-sections of real estate.
• For commercial properties, a net 41.5 percent of lenders report tightening lending standards— the highest share since the October 2020 survey. The decidedly risk-averse reading in the most recent survey comes after an equal split of underwriters tightening and loosening in the prior survey (April 2022).
• For Multifamily, a net 30.3% of respondents reported tightening underwriting standards in the July 2022 survey—a shift of 39.5 percentage points from April.
• Construction lending saw the largest share of underwriters pulling back on the reins, as 48.4% reported tightening standards.
• CMBS issuance have slowed in 2022 as higher interest rates reduced available leverage, pushing loan coupons and debt yields higher, leading to an overall slowdown in the market.
• While there have only been two significant CMBS deals so far in the third quarter, some important trends appear to be taking shape. The percentage of multifamily loans dropped from 12% to 6% quarterover-quarter, while hospitality loans climbed from 1% to 9%. While the decline in multifamily issuance may be explained by more loans being securitized as CRE CLOs than CMBS, the uptick for hospitality is less evident given the sector’s struggles, implying stronger underwriting metrics.
• LTVs for hospitality loans fell by about 5% while LTVs on hospitality loans declined close to 10%. Uncertainty regarding the sectors’ outlook drives the more conservative underwriting standards, potentially constraining future lending.
• Rental inventories excluding autos increased by 1.5% in July, according to the Census Bureau. While inventory growth has come down from highs hit towards the end of 2021 and the beginning of 2022, they still sit significantly higher than historical averages as pent-up orders from earlier in the year get stocked away. The development is in line with the observed fall in Industrial real estate property volume so far this year but with growth in overall dollar transaction volume.
• Durable goods, excluding defense orders, increased by 1.2% month-over-month in July, the third consecutive month order growth either increased or stayed the same relative to the previous month.
• Meanwhile, wholesale inventories continue to decline month-over-month. With July data set for release on August 26th, this could also be a key indicator impacting the outlook for the Industrial sector.
• Offices appear to be getting a slight boost from the back-to-school season, as occupancy climbed by 30 basis points to 43.5% of pre-pandemic levels in the most recent week of reporting. While the level remains historically low , occupancy has hovered around 43% since April— the uptick was evident across most major cities, except New York, Philadelphia, and Washington, DC.
• Dallas experienced the most significant increase, climbing by 1.6% week-over-week to 52% of prepandemic levels. Likely fueling the climb, relative to the lack thereof in northeastern metros, was a return to school for many students across the south in the past week.
• A recent blog by Trepp looks at the differences between rent growth rents across metros in June, which showed to be significant. In June, rents climbed by an average of 5.8%, according to Trepp’s calculations, but the deviation between the #1 metro for rent growth and the #5 metro for rent growth was 5.3%.
• The Phoenix-Mesa-Scottsdale, AZ metro registered the highest increase in net operating incomes, climbing by 9.2% year over year. Detroit-Warren-Dearborn, MI, which came in 5th, risen by 3.9% yearover-year.
• Sun Belt Metros continue to outpace non-Sun Belt metros in various metrics, with four of the top five metros for revenue and NOI being from the region.
SUMMARY OF SOURCES
• (5) https://www.census.gov/construction/nrc/pdf/newresconst.pdf
• (6) https://www.federalreserve.gov/data/sloos/sloos-202207-chart-data.htm
• (7) https://cre.moodysanalytics.com/insights/cre-news/cmbs-new-issuance-market-unfreezes/
• (8) https://tradingeconomics.com/united-states/retail-inventories-ex-autos
©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.
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.
Read the full White Paper Here (click to download)
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
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
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.
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.
Read the full White Paper Here (click to download)
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.
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
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
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.
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.
Read the full White Paper Here (click to download)
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
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.)
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.
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.
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.
Read the full White Paper Here (click to download)
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*
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.
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.
Read the full White Paper Here (click to download)
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.
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.
