1. THANKSGIVING INFLATION

• As Americans sit down for this year’s Thanksgiving, it’s more than just after-dinner-waistlines experiencing uncomfortable infl ation levels. According to a recent Chandan Economics analysis, the average price of turkey has increased a whopping 16.9% in the past year, more than doubling the current CPI rate of inflation (7.7%).
• Turkeys aren’t the only ones flying high this year. Compared to one year ago, potato prices are up an average of 15.2%. The other fresh vegetables at the table also see significant price pressures, albeit at a slightly more palatable 8.3%. Meanwhile, ham, another popular protein item, is up by 9.1% year-over-year.
• Other items noted in the report, such as flour and butter, are up this year by 24.6% and 26.7%, respectively. Meanwhile, egg prices are up by an odious 43.0%.
• If the above was sobering, a helpful caveat might be that this year, wine, beer, and spirits have all seen lower-than-average pricing pressures.

2. INFLATION

• According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 7.7% year-over-year through October and 0.4% month-over-month. Notably, between February 2021 and June 2022, monthly prices grew by at least 0.5% in 17 of the 21 months. Monthly inflation has been below 0.5% now for four consecutive months.
• Energy costs bounced back in October to become the largest major contributor to price pressures again, climbing 1.8% month-over-month following three consecutive declines.
• Food costs, while continuing to rise, decelerated to their most tepid increase since December 2021, rising just 0.6%. On the other hand, Shelter costs continued to accelerate in October, rising by 0.8%. Food and Shelter costs have risen by 10.9% and 6.9% over the past 12 months, respectively.
• Core CPI, which removes food and energy prices from the calculation, is up 6.3% over the last 12 months and 0.3% month-over-month. Core prices have decelerated slightly from summer levels but remain significantly above the Federal Reserve’s 2% target.

3. ULI-PwC EMERGING TRENDS IN REAL ESTATE

• Respondents in this year’s Emerging Trends in Real Estate by ULI-PwC appeared to agree that despite several uncertainties facing Commercial Real Estate in the year ahead, most remain optimistic about the industry’s long-term outlook.
• Among the key themes covered in the 2023 report was the workforce transformation enabled by remote work. By some estimates, in several major markets, less than half of all workers who have access to an office attend one on any given day. The report’s analysis estimates that 10-20% of Office stock may need to be repurposed as a consequence.
• Discussions about liquidity and capital markets were also a key theme in this year’s report, as sentiment has shifted from an “everyone wants in” headline to a more cautious and selective approach to capital deployment. Higher interest rates are not expected to trigger a sell-off in real estate assets, but investors are placing more weight on long-term fundamentals as capital availability shrinks.
• Infrastructure spending, which has been of focus in previous years’ reports, shifted from a relatively negative outlook to a positive one following Washington’s achievement of new legislation this year. An estimated $600 billion in new transportation funding and another $65 billion for broadband expansion, among other provisions, is seen as a critical investment, especially as several US metros experience
  generational growth.
• Housing affordability also remained on top of investors’ minds, as high financing costs and supply chain issues strain construction in a housing market already in short supply. While this may mean pain for many consumers in the short term, residential real estate investors are poised to benefit from demand trends that necessitate more capital in the space.

4. RETAIL SALES

• In October, US retail and food services sales saw their most significant single-month increase since February, climbing by 1.3% month over month to $694.5 billion following a flat performance in September.
• Motor vehicle dealer sales also rose 1.3% month-over-month through October, assisted by the easing of some supply chain issues. Sales at gas stations increased by 4.1%, primarily due to rising gasoline prices. Gas station sales are up 17.8% year-over-year.
• Excluding gasoline and autos, retail sales climbed a more modest 0.9% month-over-month but still outpaced recent monthly performance.
• Sales at food services and drinking places climbed by 1.6% month-over-month while volume at food and beverage storefronts rose by 1.4%. Non-store retailers rose 1.2%, furniture stores 1.1%, and building materials 1.1%.

5. RETAIL INVENTORIES EXCLUDING AUTOS

• US retail trade inventories, excluding autos and parts, dropped 0.1% month-over-month in October, the first negative reading for inventories since the middle of 2020.
• The news rings positive for retailers, many of who have cited excess merchandise as weighing down on profits in recent months. As the holiday shopping season approaches, many in the sector have begun sales campaigns earlier to both reduce inventories and adjust to post-pandemic spending patterns.
• On the other hand, high inventories have helped boom demand for Industrial space, which could see some softening activity as retail inventories decline. Nonetheless, the pandemic shift in online shopping and the overall resiliency of consumer spending should help reduce the exposure of Industrial assets to sudden changes in inventory.

6. GROCERY’S ONGOING RESILIENCE

• Despite falling activity compared to 2021, grocery stores have maintained most of their increased foot traffic relative to pre-pandemic levels, according to a recent analysis by Placer AI.
• Since June, year-over-year grocery store visits have been negative. Still, much of this is influenced by the elevated activity levels we saw in 2021 and the subsequent normalization of said activity. Grocery store visits have held above their pre-pandemic benchmark in three out of four months over the same period, signaling that the sector is maintaining its pandemic-era growth.
• The analysis notes that while overall visits have declined in recent months, visit duration has increased. The increase in duration also began in June, in line with when visits began dropping, suggesting that inflation pressures incentivize people to shopless, but purchase more in bulk.

7. MSCI RCA PROPERTY PRICE INDEX

• Commercial real estate prices rose 7.3% year-over-year through October, according to the latest national all-property index released by MSCI Real Capital Analytics (RCA). Prices declined 0.4% on a monthly basis.
• 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 and saw another double-digit decline in October.
• Industrial retains its top spot, particularly standing out with a 0.7% month-over-month gain in prices, while annual growth hit 16.9%. Still, October was the seventh consecutive monthly deceleration for Industrial prices.
• Apartment prices fell 0.6% from September as slowing rent growth appears to have trickled into valuations. Apartment assets are still up 11.3% year-over-year, trailing only Industrial properties.
• Retail prices fell by 0.3% in October after being flat for two consecutive months but climbed 18.2% year-over-year.
• Office prices fell 0.1% month-over-month from September, but are up 5.2% year-over-year.
• Price growth in the six major gateway markets tracked by MSCI RCA continued to slow in October, falling by 0.8% month-over-month and climbing by just 0.8% year-over-year. Meanwhile, non-major metros were flat from September to October but are up 9.9% year-over-year.

8. FHFA MULTIFAMILY LOAN PURCHASE CAPS

• The FHFA recently announced its 2023 multifamily loan purchase caps for Fannie and Freddie, which will total $75 billion each, down from $78 billion each in 2022. According to an agency statement, after the caps were announced, they reflect an “anticipated contraction of the multifamily originations market” in 2023.
• The agency will also require that 50% of the lending be mission-driven affordable housing, in line with last year’s levels. However, it has added a new workforce housing category that it hopes will incentivize conventional borrowers to maintain rents at affordable levels for “extended periods of time.”
• The FHFA also plans to allow loans to “finance energy or water efficiency improvements” for units affordable at or below 80% of area median income (AMI) classified as mission-driven. This level was 60% of AMI in 2022.

9. NAHB/WELLS FARGO HOUSING MARKET INDEX (HMI)

• According to this month’s preliminary estimate, the NAHB/Wells Fargo Housing Market Index (HMI) fell from 38 to 33 in November. All subcomponents of the index — current single-family home sales, projections of single-family home sales over the next six months, and current traffic of prospective buyers — posted month-over-month declines.
• Regionally, the West was the only of the four major regions to post an increase from October to November, rising from 25 to 28. The Midwest saw a modest decrease over the month by one index point, while the Northeast and South fell by 17 and 7, respectively.
• The HMI measures builder confidence on a scale of 0 to 100, calculated based on respondents rating their sentiment from “poor” to “good” and “low” to “very Low”. Confidence has now fallen for 11 consecutive months, returning to levels not seen since the early days of the COVID-19 pandemic.

10. MANUFACTURING PRODUCTION

• US manufacturing production rose by 2.4% year-over-year through October 2022, a decline from September following consecutive months of acceleration in August and September.
• The direction of production levels over the past couple of months provided hope that activity had bottomed out in July, but October was the smallest relative increase in production levels since January.
• The Federal Reserve tracks manufacturing production, considered to account for 78% of total economic production in the US, including major segments such as Chemicals (12%); food, drink, and tobacco (11%); machinery (6%); fabricated metal products (6%); computer and electronics (6%) and motor vehicles and parts (6%).

SUMMARY OF SOURCES

• (1) https://www.linkedin.com/posts/chandan-economics_chandan-economics-thanksgiving-infl ationactivity-6999099751799353344-jQMA?utm_source=share&utm_medium=member_desktop
• (2) https://www.bls.gov/cpi/
• (3) https://www.pwc.com/us/en/industries/fi nancial-services/asset-wealth-management/real-estate/emerging-trends-in-real-estate.ht
•  (4) https://www.census.gov/retail/marts/www/marts_current.pdf
• (5) https://tradingeconomics.com/united-states/retail-inventories-ex-autos
• (6) https://go.placer.ai/library/brick-and-mortar-grocerys-ongoing-resilience?submissionGuid=348b3498-d4db-4d93-a490-736075ce198b
• (7) https://www.msci.com/research-and-insights/market-insights
• (8) https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-2023-Multifamily-Loan-Purchase-Caps-for-Fannie-Mae-and-Freddie-Mac.aspx
• (9) https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index
• (10) https://www.federalreserve.gov/releases/g17/current/default.htm

Opportunity Exists
Everywhere

BROKER COOPERATION IS THE
KEY TO UNLOCKING IT

Executive summary

Our previous whitepaper made the case for commercial real estate broker cooperation from a market logic point of view. In this follow up we consider how full broker cooperation is essential for brokers and their clients to unlock the opportunities that exist in the CRE market today. Specifically, we look at the rise of non-primary real estate markets in the US; the changing of the guard in terms of who is investing in CRE today (hint: it’s not the usual suspects); and finally, unlocking opportunity in CRE wherever we find ourselves in economic cycles. It all comes down to creating an efficient, optimized market, and the last three-plus decades have shown us that broker cooperation is key to this.

This whitepaper is SVN International Corp’s President and CEO, Kevin Maggiacomo’s last piece before his death in 2022. Thank you to Solomon Poretsky, SVN Chief Development Officer, and Cameron Williams, SVN Director of Research and Sales Operations, for their contributions.

Introduction

SVN’s not-at-all-best-kept-secret is that we eat, sleep, and breathe broker cooperation. For us, it’s the future of the CRE market, and, full disclosure, it’s something we’ve been doing for decades already, and we’re consistently seeing the upside of doing so.

We think the rest of the industry urgently needs to tap into the power of cooperation to drive shared value. We made the case for this in our previous whitepaper.

“Time’s up for
non-cooperation in CRE”

In this new whitepaper, we start exploring the potential opportunities that cooperation unlocks, specifically looking at three big trends taking place today:

1. The growth of secondary and tertiary markets
2. The rise in new entrants into the CRE market
3. Unpredictable and changeable economic cycles

But first, we discuss the CRE broker of the future. Because as well as being the key to opportunity and value, broker cooperation is inevitable and is being driven by the intersecting forces of client expectations and the rise in digital technology in our industry. These twin forces will shape the broker of the future, who will, in turn, be best positioned to benefit from cooperation and the opportunities that cooperation unlocks.

The CRE broker of the future

The CRE 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. It will become increasingly commonplace for your clients to profile and understand a CRE market they are interested in investing or divesting in. And it won’t matter if they live in that town’s center, 2,800 miles away, or on the other side of the planet.

Inevitably, this means that the broker who doubles down on simply connecting two sides of a transaction – just being a matchmaker – is going to be usurped by the advisor who understands that modern clients, whether buying or selling, need more than this. If sellers, buyers, landlords, and tenants have unprecedented access to data, then what they really need is someone who can help them make sense of that data.

The broker of the future is not going to be a salesperson for the product, but instead will add value by focusing on where a property is going, and strategically advising their client accordingly. Meanwhile, the matchmaker role is inevitably going to be automated.

As well as being more informed than ever before, clients understand the power of a network (because they use them every day to book vacations, shop, commute, and hire) and will expect their real estate advisor to have the same understanding. It’s going to be very difficult to insist that a single person’s contact list will magically produce an optimal shortlist and ultimately, the perfect buyer for their property. 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.

“Opportunity Exists
Everywhere”

Where then is this opportunity? Quite frankly, it’s everywhere, but there are three specific trends we are most excited about.

Opportunity 1

THE RISE OF SECONDARY AND TERTIARY MARKETS

Conceptually, the US has become much smaller. And this means that there are an increasing number of interesting opportunities in secondary and tertiary CRE markets that can round out property portfolios and offer attractive returns. The key, though, to unlocking these markets is, you guessed it, broker cooperation.

Every day we can see how the country is getting smaller. Regional accents are no longer so pronounced. We all shop at the same grocery and department stores and buy the same brands. And wherever we live, we, for the most part, have similar access to education, medicine, the internet, and other services. The most recent narrowing of the gap between urban and rural, and big and small towns is remote work untethering where we live from where we work. This has made the attraction of a great lifestyle in smaller towns across the country undeniable and achievable, especially
when you consider the rising costs of living and doing business in primary markets.

WHERE PEOPLE GO, BUSINESS FOLLOWS, AND SO DOES CAPITAL

According to the National Association of Realtors (NAR) Research Group’s October 2022 Commercial Markets Insights Report, rent in multifamily properties has grown fastest in secondary and tertiary markets, specifically in Sun Belt areas such as Knoxville (11.7%), Miami (10.6%), Charleston (10.1%), and Orlando (9.4%)1.

Further, the May 2022 NAR report indicated that nearly all the major absorption gains in office space were in non-primary markets, particularly Inland Empire (1.3 million square feet) and Las Vegas (1.1 million square feet). Charleston, Salt Lake City, San Antonio, Raleigh, and several Florida metro areas (Pensacola, Fort Myers, Orlando, Sarasota, Naples, and Miami) also saw significant increases in office occupancy.

The same report showed that traditionally non-primary property markets saw the largest job gains, particularly in the South and West, compared with larger numbers of job losses in primary markets. This makes it unsurprising that when you look at Urban Land Institute and PWC’s Emerging Trends in Real Estate Report 2022, you’ll find that many secondary and tertiary markets appear on its US markets-to-watch lists.

1.  Nashville
2.  Raleigh/Durham
3.  Austin
4.  Charlotte
5.  Dallas/Fort Worth

These non-primary cities all appear in the top 10 of Overall Real Estate Prospects; Local Market Perspective: Investor Demand; and Local Market Perspective: Availability of Debt and Equity Capital in Emerging Trends in Real Estate Report 2022

While we were undeniably seeing perfect conditions for secondary and tertiary markets to offer increasing value for investors, we’re not saying primary markets are going anywhere. This is not a zero-sum game. Instead, we’re suggesting that investors consider the opportunity in secondary and tertiary markets in terms of the value that assets in these markets can bring to their overall CRE portfolio.

“IF INVESTORS ARE TRULY OPEN TO THE
BEST TRANSACTION AND NOT ONLY
WHAT THEY LIKE OR KNOW,
SECONDARY AND TERTIARY MARKETS
HAVE SOMETHING TO OFFER.”

Surveying the entire market, including non-primary markets, to find properties that meet your risk and return criteria is especially important now because properties that meet these criteria are likely to be everywhere.

Similar properties across Los Angeles, Phoenix, and Tucson could have cap rates of five, six, and seven, respectively. What makes each of these a good deal or not depends on what you need the asset to do in your portfolio.

And the way to find these great deals? Broker cooperation, of course. Say you’re a New York or Los Angeles-based CRE broker with a great relationship with your client. You want to help them diversify their portfolio across more markets. Do you need to suddenly become an expert on all 384 metropolitan areas across the US? That’s impossible. Even with the internet, there’s no way you can build the same network you may have in
New York or LA. And you’re never going to be able to tap into the on-the-ground, back-channeled intelligence that unearths the gems before anybody else finds out about them. But, having a relationship with a cooperative broker who, in turn, has relationships with like-minded colleagues across the country gives you access to that high level of intelligence everywhere, helping you find more opportunities for your clients.

Likewise on the seller side, if you’re a secondary or tertiary market broker, the best way you can efficiently market your client’s property is by reaching the largest group of great prospects. Today, these are coming from all over the country (and even beyond – see Opportunity 2 below). A single broker cannot possibly know all the potential buyers for an asset, and this is especially true in secondary and tertiary markets.

But with broker cooperation, you’re marketing that property to the widest possible audience.

“THE RISE OF THE SECONDARY AND
TERTIARY MARKETS TRULY
DEMONSTRATES THE ABILITY OF
COOPERATION TO UNLOCK
OPPORTUNITIES IN CRE. FOR
BUYERS, IT HELPS THEM FIND THE
IDEAL PROPERTY FOR THEIR
PORTFOLIO, WHEREVER THAT
PROPERTY IS LOCATED. AND FOR
SELLERS, IT CREATES AN EFFICIENT
MARKET, SO THEY DON’T LEAVE
MONEY ON THE TABLE.”

Opportunity 2

NOT THE USUAL SUSPECTS

More money is flowing into CRE than ever before. And it’s coming from some atypical places. For instance, according to CoStar stats, 66% of deals this year so far have been with buyers from out of state, or even outside of the US. This means that if you’re only ever chasing the usual suspects on behalf of your client, you are missing out on a large swathe of the potential market for that property. And most likely missing out on the best buyer for your investor. This illustrates the stark difference between old-school brokers and the broker of the future who plays a strategic advisory role.

“A STRATEGIC ADVISOR WOULD NEVER
IGNORE A PORTION OF THE TOTAL
ADDRESSABLE MARKET.”

WHERE ARE THESE NEW INVESTORS COMING FROM?

1. ULTRA-HIGH NET-WORTH INDIVIDUALS AND FAMILY OFFICES LOVE CRE

According to the UBS Global Family Office Report, private equity allocations in real estate are set to rise by 37% over the next five years.

2. INSTITUTIONAL MONEY LOVES CRE

Institutional allocations to real estate have grown for eight straight years, with this trend expected to continue in 2022, according to Hodes Weill & Associates 2021 Institutional Real Estate Allocations Monitor. It forecasts 2022 allocations will reach 11%, which is equivalent to an additional $80 billion to $120 billion of capital flowing into real estate.

3. INTERNATIONAL MONEY LOVES CRE

“ACCORDING TO NAR, FOREIGN
INVESTOR ACQUISITIONS OF CRE
IN THE US INCREASED BY 49% IN 2021.”

This was worth an estimated $58 billion. And, the most recent survey conducted by The Association of Foreign Investors in Real Estate (AFIRE) noted that 75% of members (175 organizations across 23 countries) expected to boost their investment in the US over the next three to five years, with the most popular property surveyed being multifamily. There is no doubt that the real estate secret is out to non-professional and non-traditional buyers, and more unexpected money is coming into real estate today than in recent memory. Real estate does well, even when interest rates climb, and the market is uncertain. This is driving increased participation by people and institutions many brokers have never heard of, and certainly don’t have on
their Rolodex.

And this is only one set of unusual suspects to consider. See Opportunity 1 for insight into how increasingly investors are including secondary and tertiary markets in their portfolios. They’re also crossing state lines and national borders. Finally, investors are blurring the lines between asset classes with mixed-use buildings and cross-asset buying.

The conclusion? You can’t base your future buyers’ list on people who have bought in the past. And any broker that claims to know all the buyers in the market is mistaken and is leaving their clients’ money on the table. To take advantage of this opportunity brokers need a strategy to leverage the power of the missing 66% (or more) to drive value for their clients and brokers. And they have a choice here. They can go it alone and attempt to build their own comprehensive database of potential buyers, or they can energize the entire brokerage community through fee sharing and full cooperation to bring these buyers to the table.

Opportunity 3

NEGOTIATING CYCLES IN THE ECONOMY

Challenging, and changing, economic times bring different market conditions. Opportunities exist, but in different places and you may need to look for them. For instance, buyers apply different standards and operate with modified strategies. And, at the same time, sellers operate with higher degrees of motivation but with increased external pressures. Creating an efficient market is more difficult than ever.

Nevertheless, there are always opportunities to be had in the CRE market, whether the market is on an upswing and things are looking rosy, or if times are tough and uncertain and the market is in a slump. If you look for opportunities you’ll find them, as long as you are ready and well-positioned to take advantage of them.

In challenging economic times, commercial real estate assets have historically been viewed as countercyclical, with trophy properties, multifamily, agricultural land, and necessity retail doing particularly well. And buying opportunities abound for cash-rich investors. Additionally, in inflationary times, real estate has historically been a hedge as the value of money decreases.

The first unavoidable truth is that economic cycles are inevitable. And the second unavoidable truth is that investors absolutely need a CRE broker during a downswing (Investors need one during an upswing as well, even though they don’t think so. But they are unlikely to be getting the best price without a broker aiding the negotiation, even in buoyant economic times.)

During a downswing in the economy the most prominent buyers are those looking for a discount, and, at the same time, they’ll be more demanding with their expectations. But it has always been possible to sell investment assets with positive cashflows during a downturn. More recently, this is even more likely with more money flowing to CRE in more places around the country (see Opportunities 1 and 2.)

“THIS MEANS THAT NOT ONLY DO
INVESTORS NEED A BROKER TO
NEGOTIATE THE DEAL, THEY ALSO
NEED BROKERS THAT FULLY
COOPERATE TO REACH THE WIDEST
POTENTIAL MARKET FOR AN ASSET
AND MAXIMIZE THE SELLING PRICE.
THE MOST POWERFUL MARKETING
TOOL THAT A SELLER HAS IS THE
FEE, THE INCENTIVE TO MOTIVATE
THE BROKERAGE COMMUNITY TO
WORK ON THE DEAL, AND THE
INCREMENTAL PROFIT ON AN
ADDITIONAL OFFER IS SIGNIFICANT.”

Conclusion

Whether you are a buyer or a seller of CRE, or representing a buyer or a seller, it is clear that broker cooperation is inevitable and essential. Going it alone in a data-driven, networked world is going to become increasingly isolated and ineffective. Cycling through the list of usual suspects in traditional locations is going to run out of steam very soon.

“MEANWHILE, BROKERS THAT DO
COOPERATE FULLY, AND ACT AS
STRATEGIC ADVISERS TO THEIR CLIENTS
WILL FIND AND GRAB THE
OPPORTUNITIES THAT CRE OFFERS.”

We should know, as SVN was founded on the basis of these principles in 1987 and we have been working like this for over 36 years.

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

We are ready to assist investors with Orange County commercial properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

The EPA doesn’t specify a timeframe or discuss reductions, but it may limit the rate of future rises.

Our Orange County commercial real estate brokers will help you every step of the way in finding the right commercial investment property, contact us for details.

Crexi, a popular listing website among brokers, investors, landlords and tenants, the price per square foot for industrial pricing increased by 5.4% in September.

1. GDP

• 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 fixed 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.

2. BEIGE BOOK ANALYSIS

• 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.

3. MSCI RCA COMMERCIAL PROPERTY PRICES

• 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 fl at 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.

4. INDEPENDENT LANDLORD RENTAL PERFORMANCE

• 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.

5. INDUSTRIAL SECTOR WOES

• 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.

6. STUDENT HOUSING

• 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.

7. OFFICE DEMAND

• 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 office 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 office 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.

8. EXISTING HOME SALES

• 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%).\

9. SUBLEASING ACTIVITY

• 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.

10. CONSUMER CONFIDENCE

• 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, inflation 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.

SUMMARY OF SOURCES

•  (1) https://www.bea.gov/news/2022/gross-domestic-product-second-quarter-2022-advance-estimate
• (2) https://www.federalreserve.gov/monetarypolicy/beigebook202209.htm
• (3) fi le:///Users/julynovember/Downloads/2210_RCACPPI_US.pdf
• (4) https://www.chandan.com/independentlandlordrentalreport
• (5) https://www.globest.com/2022/10/21/heres-what-prologis-really-thinks-about-the-industrial-sector/
• (6) https://www.yardi.com/blog/matrix/student-housing-earns-high-marks/34436.html
• (7) https://vts.drift.click/october-2022-vodi?utm_medium=email&utm_source=content&utm_campaign=october-2022-vodi&utm_content=subscriber-email&mkt_tok=ODExLVNKUS04MDMAAAGHtHGjJRYdGvxJIG3YEnerr8PFTwcA7NimpD97mPPbxxYy-_0Io2GUFzsv48Rb2_aP3CYo9ZzRnpq6DjPrpvREigBYH2-Fp-xwsSkow_Bff8X
• (8) https://www.nar.realtor/newsroom/existing-home-sales-decreased-1-5-in-september
• (9) https://www.trepp.com/trepptalk/sublease-availability-growing-in-smaller-us-cities
• (10) https://www.conference-board.org/topics/consumer-confidence

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In the long run, investors who stay engaged in the market despite market uncertainty may outperform those who stay off the market.

Some CRE investors choose to sit it out when challenges start to pile up. But is it the best course of action?

Less Competition When Making Offers Can Equals Higher Returns in Long Term

John Chang of Marcus & Millichap notes, “It makes perfect sense to be cautious, but on the other hand, a lot of investors stay active or even ramp things up a notch when others are stepping aside.” “The agreements they make in these times frequently produce the best long-term results.”

While One Area May Be In Distress, Other Markets Are Usually Booming

According to Chang, the CRE market is usually “inefficient,” with variations by geography and property type. He claims that while another metro is expanding, one could encounter significant obstacles.

Chang points to the dot-com bubble as a prime example of this. The Bay Area was particularly hard-hit by the recession, but many other markets fared well and kept expanding.

Timing and Adding Value

According to Chang, he also exhorts investors to look for possibilities that add value. According to him, purchasing an asset now that is deemed overvalued by sales comps may be advantageous if doing so will allow the buyer to combine and enhance a number of properties, resulting in a higher return on the portfolio as a whole. According to him, uncertain times might also offer chances to purchase special assets that are rarely traded or to reposition assets.

According to Chang, the optimum moment to switch horses may be during uncertain times.

Consider What the Market Will Look Like In 5 Years

Investors must also consider where the market will be in three to five years. When purchasing properties, Chang advises using loans without prepayment penalties so that the properties can be refinanced if and when interest rates decline.

According to Chang, investors that make purchases during uncertain times frequently have fewer rivals for their business and benefit in the long run. In contrast, investors who “step to the sidelines with the herd” because they are afraid to conduct a deal during an uncertain market typically miss the best investment possibilities the market has to offer. The key to successful real estate investing is to look long-term, take advantage of opportunities, and have an eye on the future.

We are ready to assist investors with Santa Ana commercial properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

While nobody is sure whether Democrats or Republicans will end up with control, it is certain that some officials might attempt to pass some significant legislation.

We are ready to assist investors with Santa Ana commercial properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.

Cap rates are projected to keep rising in Q4; the only question is by how much.

The CRE Industry as a whole should be ready to advocate regardless of the election’s outcome.

We are ready to assist investors with Santa Ana commercial properties. For questions about Commercial Property Management, contact your Orange County commercial real estate advisors at SVN Vanguard.