The commercial real estate market is beginning to turn and the investment climate is thawing, John Chang, the national director of research and advisory services at Marcus & Millichap said in a video on the company’s website.
A metaphorical gun has gone off, “at the start of a track event,” he noted. “It’s almost like the combination of Chairman [Jerome] Powell’s commentary together with the jobs report was a trigger.”
In recent communications, Fed officials have emphasized their increased focus on jobs and unemployment, the second part of their dual mandate, and decreased emphasis on inflation, as they set monetary policy.
Early August unemployment figures cemented market predictions that the Fed will cut rates in September, Chang said. “It looks like the Fed has changed its tune.”
“Real estate investor buzz has already begun,” Chang added. “I can see it, feel it, sense it… Real estate investors are sprinting down the real estate track, to find properties, get them financed, get them under contract, complete the diligence process, get the deal done, get it closed.”
Specific changes in sentiment Chang noted include investors’ increased willingness to take on negative leverage.
“I think the math has changed.”
Given the widening of the spread between 10-year Treasuries and the average cap rates, driven by falling prices and rising cap rates, more deals are making sense to investors, Chang said.
SECTOR BY SECTOR
“The cap rate spread over the tenure is widest for office properties,” Chang said. “While there’s considerable uncertainty about the outlook of the office sector in general, the opportunities presented by the nearly 400 basis point spread over the tenure is starting to capture some investors’ imaginations.”
Chang also noted the attractiveness of retail properties, which are enjoying record low vacancy rates and record rent growth, while benefiting from expectations of falling interest rates.
He also called out industrial, self-storage, and multifamily as sectors that could be in focus for investors.
“The emergence of storage as a mainstream commercial real estate asset class over the last 10 years continues to draw capital, and the widening of the yield spread could boost demand for these assets,” Chang said. “Finally, the spread between the average apartment cap rate and the tenure has reached 200 basis points – the magic number.”
THE RACE HAS STARTED
As sentiment turns, transaction volume will come back “quickly” and capital that has been sitting on the sidelines gets put to work, Chang noted.
“I anticipate the competition for assets will heat up quickly,” he said. “The race to place capital has started.”