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COVID-19 and the Economy: Changes Coming to Commercial Real Estate

Posted on March 27, 2020 by Mike Kushner in Blog, Commercial Real Estate, Local Market No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

No matter where you go to consume news, you will be bombarded by anything and everything related to COVID-19. The impact of this novel virus on our world is impossible to fully understand or appreciate at this time. The term “unchartered water” is being used quite frequently and it couldn’t be more accurate.

Every industry is wondering how this will impact their business, both immediately and long-term. The simple truth is that no one really knows right now. The best we can do is look to history to see how the world has reacted to similar pandemics, economic crisis, and panic. Though the world has not seen a virus causing a global shut down like we are seeing with COVID-19, we can anticipate the significant changes we may expect to see take right here in Pennsylvania. Here’s how commercial real estate is getting pulled into the fold.

Economic Uncertainty. With so much uncertainty in the stock market these last few days, people get nervous. Talk to anyone working in the financial services industry, and he or she will tell you that most of their time right now is spent talking people off the ledge of making panicked decisions. And their fear is not unfounded. After all, trillions of dollars in paper wealth have essentially evaporated.

As people watch their diminishing 401K balances, they feel rightfully uncertain. And if such uncertainty causes consumers to hit the pause button on spending, a ripple effect is bound to take place. When attendees avoid concerts, sporting events, movies, or restaurants, businesses suffer a decline in sales. Operations who supply these enterprises, such as the trucking, food, linens, security, novelties industries then feel the pinch as the ripples become waves of lost revenue. How does this relate back to commercial real estate? All of these businesses rent or own commercial real estate, meaning CRE gets pulled into the downward spiral.

Supply chain disruption. Here are the facts (changing daily), steel production is down 90% in China. Auto sales in Asia is down 95%. One of the Port of LA’s largest exports is auto parts. Couple these factors with the typical container cancellations during the Chinese New Year and you create an immense lag in product delivery which will ripple out to impact just about every other industry imaginable.

Whole industries have come to a sudden halt. Hotels, restaurants, construction businesses, retail stores – and this is hardly scratching the surface of the businesses across the Commonwealth mandated to shutter their businesses for at least two weeks – likely more. The ripple effect this will have immediately and well into the future is near impossible to quantify. It’s not unlikely that some businesses may fold as a result. If such businesses owned or rented commercial real estate, this is space that will be vacated. Additionally, a lull in new construction will decrease the amount of new space delivered to the market at least through 2020.

Interest rates. There is much conversation and reason to believe that we will soon see more favorable interest rates, making commercial real estate financing more affordable. The reason is that mass stock market sell offs will generate proceeds which must be invested. Typically, a safe harbor for this cash is short term instruments such as Treasuries. However, this needs to be taken with a grain of salt. On March 3rd, The Federal Reserve lowered the federal funds rate by ½ of one percent which was met with much applause. The truth is that this is irrelevant. The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. The hard truth is that the federal funds rate has no impact on ten-year treasury yields.

The Silver Lining – Despite the doom and gloom being predicted for many industries as the result of the spread of COVID-19, there are (at least) three reasons why commercial real estate should look to the silver lining in all of this. Here’s what they are.

#1. Some stock market investors fleeing the equity markets may choose to start investing in real estate. Why wouldn’t they invest in CRE? After the rapid downturn that’s transpired in the last few weeks, it only seems logical that some would say enough is enough I’m going to pull my money out of the stock market and invest it in a lower risk type of investment.

#2. Treasury rates have hit historic lows. On March 9th, the ten-year treasury bottomed out at 0.569%, rising to 0.981% by Friday, March 13. For comparison, a year ago, the ten-year treasury closed at 2.592% so the decline has been dramatic to state the obvious. Those of us who have debt, whether it is a home loan or loans on our rental properties, are going to benefit by refinancing debt with significantly lower interest rates.

#3. If there is increased demand for CRE and interest rates remain low, the logical result will be that capitalization rates will continue to compress even further than they are right now. This means that even if a real estate investor doesn’t refinance his rental properties, the value of his real estate will still go up as cap rates continue to compress. So bottom line is that those of us who have invested in commercial real estate will inadvertently benefit from this black swan event.

#4. It’s now a tenant’s market. The speed at which the market shifted from a landlord’s market to a tenant’s market can hardly be overstated. COVID-19 has effectively caused a collapse of U.S. office demand, which ironically comes after the market set a post-recession record just last year. For tenants who are hunting for new office, retail, or industrial space, chances are you’re going to be able to negotiate favorable terms and pricing.

In trying and changing times like these, I am very glad I chose to be an exclusive tenant agent representative/buyer’s agent for commercial real estate. I can still be an asset to my clients, whereas other forms of brokerage are more greatly impacted by the COVID-19 pandemic. During this historic time, I can serve my clients through subleasing, lease restructuring, and negotiating better deals based on current market conditions.

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

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Growing U.S. Economy Drives Demand for Commercial Real Estate

Posted on February 13, 2020 by Mike Kushner in Blog, Commercial Real Estate, Trends No Comments

The current economic climate in the United States has been a bit of a roller coaster, and depending upon the industry you’re examining, you may find more ups than downs or vice versa. Trade wars, combined with a slowdown in the U.S. manufacturing sector and around the globe, shook up equity markets and businesses in 2019. But robust job growth has extended the spending power of American consumers, which is ultimately our nation’s economic engine, according to CoStar’s 2019 Year in Review of the U.S. Economy.

To put this into perspective, the United. States is currently experiencing the longest economic expansion since World War II. Additionally, key indicators point to the economy staying solid in 2020, which will extend the record bull run for U.S. commercial real estate. While there are some risks that could eventually move the nation toward a recession, as it stands, the growing U.S. economy is driving demand for commercial real estate, with many factors emerging as a result. Let’s take a look at what the most profound outcomes of this CRE growth.

The growing economy bodes well for demand for commercial and multifamily real estate.

What it means for CRE: Expanding payrolls will continue to fuel demand for office space, while rising incomes and consumption will boost demand in industrial and retail sectors. As job growth continues, consumers appear quite optimistic and unconcerned by the trade war and any economic slowdown abroad.

Migration of workers from the Northeast and Midwest is growing the labor markets, which is fueling real estate demand, specifically in the South and U.S. West.

What it means for CRE: With the increase in labor as well as a growing demand for real estate in the South and U.S. West regions, CRE developers and investors should look to these markets as viable areas of growth. An increase in job creation also means a rising demand for office spaces and apartments. Property management will benefit from high occupancy rates, and job growth will lead to an increase in leasing. With low interest rates, commercial prices will likely see some gains.

The answer to combat rising development costs and rental prices in urban areas may be micro-apartments.

What it means for CRE: Simply put, micro-apartments extract the most value from every square foot. Standardized designs and “pre-fab” or modular construction cut development costs and shorten construction time, meaning developers could reduce expenses and start generating rental income more quickly. Some developers are designing studio apartments that are one-fifth the size and 40% of the cost of a typical studio, netting out to as little as 175 square feet.

Investing in industrial real estate, over retail, is the safer bet.

What it means for CRE: The industrial vacancy rate is extremely low, in many cities it’s below 5%, even 1% to 2% in some areas. Meanwhile, internet sales are cannibalizing traditional retail spaces, such as department stores, malls, and shopping centers. A unique aspect of this changing market is the emergence of “click-to-brick” retailers, like Amazon, that are establishing small retail stores in key areas. These spaces don’t carry much inventory, but they give customers the opportunity to interact with physical products and place an order. So for CRE investors and developers, industrial real estate carries more certainty and less risk than retail at this time.

Moving into the new decade, economists expect economic growth to slow somewhat as the labor market cools.

What it means for CRE: Consumer spending may lose some momentum and persistent global and trade policy headwinds weigh on business sentiment and investment. For commercial real estate, 2020 should remain a solid year of growth, especially for the industrial market. Though real estate professionals should remain strategic and always be looking ahead to factors that could impact economic growth, and CRE growth as a result.

What is your view of the current state of the nation’s economy right now? How do you anticipate this changing in 2020? Share your thoughts and insights by leaving a comment below.

[Online Resources] Real Estate, buyers agent, central pennsylvania, Commercial Real Estate, Construction, demand, economic impact, Economy, growth, industrial, jobs, Mike Kushner, office, Omni Realty Group, pennsylvania, retail, tenant adviser, trends, united states

Why Banks are Cutting Back on Commercial Real Estate Lending

Posted on January 17, 2020 by Mike Kushner in Commercial Real Estate, Construction, Guest Blogger, Local Market, Trends No Comments

Commercial real estate lending, the bread-and-butter business for many smaller and regional banks, could further decrease in 2020. The cause is a combination of a few different factors – intense competition from non-bank lenders and rising delinquency rates to name a few. Mortgage lending is also predicted to be impacted by rising interest rates and tight housing supplies in many major markets.

This trend is not new, but rather has been slowly creeping in for years. In 2017, U.S. banks reported that demand for commercial real estate loans weakened in the second quarter, though foreign banks reported strengthened demand. Furthermore, loan growth slowed to 4.2 percent in 2018, down from 5.6 percent in 2017, according to bank call reports and Federal Deposit Insurance Corp. data.

Why exactly are banks cutting back on commercial real estate lending? And should this call for concern that a potential economic downturn is in the near future?

Rory Ritrievi, President and CEO of Mid Penn Bank

To lend some expertise on this topic, Omni Realty Group turned to Rory Ritrievi. Rory has more than three decades of experience in banking, specifically in Pennsylvania. For the last 11 years, Rory has served as President and CEO of Mid Penn Bank. Under his direction, the bank has grown from $550 million in assets and 14 retail locations to over $2 billion in assets and 39 retail locations.

Throughout his banking career, Rory has gained deep insight into when and why banks provide commercial real estate loans – and when they do not. Let’s learn what he thinks is going on in the current market, and the pending economic impact.

Omni Realty: How has commercial lending changed in the last 5 years?

RR: In the last 5-10 years, we have seen, for the most part, a return to credit fundamentals that seem to have been abandoned in the years leading up to the Great Recession. Back then it seemed like almost any deal made sense to Bankers. Now, the focus has been returned to analysis of absorption rates, discounted cash flows, borrower experience, reasonable cap rates, and strength of guarantors.

Omni Realty: In your opinion, what are the main causes of these changes?

RR: Losses. Loan losses of 2008-2012 gave a renewed focus to bankers on the true meaning of credit fundamentals.

Omni Realty: What changes would need to take place in the commercial estate market, or economy as a whole, to further improve commercial lending?

RR: Lenders need to evolve their underwriting and analytics to keep up with the evolving demographics. Baby Boomers are aging out so there is a need for more senior housing, multifamily rentals, luxury apartments, and assisted living. Additionally, high student loan balances are making the need for affordable housing in urban areas more prevalent. There is also a growing focus on renewable energy and green spaces. Finally, work from home is more prevalent which challenges the demand for traditional office space. When we look to retail, the shift toward online decreases the demand for mall space, while increasing demand for warehouse space. And we can’t overlook technology. Bankers need to not only know about emerging technology that stands to impact the market, but they must embrace it as a highly valuable tool to help them “keep up.”

Omni Realty: What do you anticipate the trend to be for commercial lending in 2020?

RR: In my opinion, 2020 will be a positive year in the lending business, particularly in Central Pennsylvania. We are in a good credit cycle and the interest rate yield curve is in decent shape compared to last year. There are geopolitical issues such as the impact of the general election, instability in the Middle East, and trade with China but I do not believe any of those issues will halt the progress of our local economy in 2020. Challenge it, yes and maybe slow it a bit, but not halt it entirely.

Omni Realty Group thanks Rory for sharing this valuable information and helping us to further understand the factors impacting how banks view commercial lending. Though banks are, for the most part, treading lightly in the market since the Great Recession, it’s encouraging to hear their renewed commitment to credit fundamentals, and helping both individuals and businesses make well-educated lending decisions.

Amidst a year that will no doubt bring change, it’s important we remain aware of the lasting impact factors such as elections and geopolitical issues may bring to our economy, both immediately and for years to come. Rory provides sound reason as to why we should not fear such changes, but rather maintain confidence in the banking economy, particularly here in Central Pennsylvania.

Do you agree with these insights, or have others to share? We welcome your feedback in the comments below!

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Census Data: National and Local Trends You Need to Watch

Posted on June 3, 2019 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Local Market, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Census data provides a fascinating look into population growth trends that stand to have a profound impact on our economy, both locally and nationally. More than just being “interesting” data to study, population growth and decline points us to important trends that will reshape supply and demand in various industries, one of the most prominent being real estate.

Just last month, the US Census Bureau released new population estimates. These estimates account for and compare the resident population for counties between the dates of April 1, 2010 to July 1, 2018. The outcome? There are shifts in population taking place across the nation that may differ from what you might assume. Let’s take a look at some of the highlights from this data from a national and local level.

At a National Level

South and West Lead Population Growth

The census data confirmed that counties with the largest numeric growth are located in the south and the west regions. In fact, Texas claimed four out of the top 10 spots. Looking at population growth by metropolitan area, Dallas-Fort Worth-Arlington, Texas, had the largest numeric growth with a gain of 131,767 people, or 1.8 percent taking place in 2018. Second was Phoenix-Mesa-Scottsdale, Arizona which had an increase of 96,268 people, or 2.0 percent. The cause of growth in these areas is the result of migration, both domestic and international, as well as natural increase. In Dallas, it was natural increase which served as the largest source of population growth, whereas in Phoenix I was migration.

Fastest Growth Occurred Outside of Metropolitan Areas

Surprisingly, no new metro areas moved into the top 10 largest areas. Of the 390 metro areas within the US (including the District of Columbia and Puerto Rico), 102 of these areas, or 26.2 percent experienced population decline in 2018. The five fastest-decreasing metro areas (excluding PR) were Charleston, West Virginia (-1.6 percent); Pine Bluff, Arkansas. (-1.5 percent); Farmington, New Mexico (-1.5 percent); Danville, Illinois (-1.2 percent); and Watertown-Fort Drum, New York (-1.2 percent). The population decreases were primarily due to negative net domestic migration.

North Dakota Claims Fastest Growing County

Among counties with a population of 20,000 or more, Williams County, North Dakota claimed the top spot as the fastest-growing county by percentage. This county increased by 5.9 percent between 2017 and 2018 (from 33,395 to 35,350 people). The rapid growth Williams County experienced was due mainly to net domestic migration, 1,471 people, in 2018. The county also experienced growth between 2017 and 2018 by both natural increase of 427 people, and international migration of 52 people.

More Growth than Decline

Out of 3,142 counties, 1,739 (or 55.3 percent) gained population between 2017 and 2018. Twelve counties (0.4 percent) experienced no change in population, and the remaining 1,391 (or 44.3 percent) lost population. Between 2010 and 2018, a total of 1,481 (or 47.1 percent) counties gained population and 1,661 (or 52.9 percent) lost population. Though there has been more growth than decline overall, the numbers indicate that this can easily shift year over year.

At a Local Level

Dauphin County

Lancaster County

York County

Cumberland County

Cumberland, Dauphin, Lancaster and York Experience Consistent Growth

The most notable trend to take place between 2010 and 2018 in Central PA is that these counties all experienced consistent growth year-over-year. Moreover the growth occurred fairly evenly over the last 8 years. This provides consistency and enables the economy to respond to the growth over a reasonable amount of time.

Counties Also Maintain Same Order of Ranking in Population

Another trend worth noting is that the counties have maintained the same order of ranking based upon population for 8+ years. For example, in 2010 these counties in order of smallest population to largest population was Cumberland, Dauphin, York, Lancaster. This is the same ranking we see in 2018, and every year in between. No county surpassed another at any point.

Lancaster Remains Largest and Fastest Growing County

Lancaster County has a major lead in population over the others. At 984 square miles, it is also the largest of the 4 counties. Between 2010 and 2018 it also experienced the largest numeric growth at 24,112 people. Number two in numeric growth was actually the smallest of the four counties, Cumberland County, which grew by 16,017 people. York County grew by 13,301 people and Dauphin County grew by 8,997 people.

Overall, the latest US Census offers valuable and insightful information related to population growth between 2010 and 2018. Understanding the cause of either growth or decline provides framework for how these shifts may continue on their course, or change in the future.

A deeper dive into the census data reveals several demographic changes impacting commercial real estate development: household formations, aging baby boomers, growing millennials, women in the workforce, and migration toward the South.

Today’s demographic changes present challenges for commercial real estate developers, but they also offer lucrative opportunities to firms creatively adapting to new demands.

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How Will Trump’s Tariffs on China Impact Commercial Real Estate?

Posted on August 8, 2018 by Mike Kushner in Blog, Commercial Real Estate 2 Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Earlier this summer, President Donald Trump approved tariffs on about $50 billion dollars in Chinese imports. Some fear this is certain to escalate a trade war between the world’s two largest economies. While others argue the short-term setbacks are outweighed by the long-term political and economic benefits. Which side will prove to be right? Only time will tell.

What we can expect, with a great deal of certainty, is that these tariffs will have a ripple effect on the United States’ commercial real estate industry. CRE professionals should be on high alert for several, short-term impacts that stand to reshape the investment decisions we make for the next five to ten years. Keep in mind, the tariffs must still undergo a review process, with hearings this month; however, should they be approved, here are the near-future impacts CRE professionals must be prepared to manage.

Higher Permanent Debt Costs and Construction Costs

CRE professionals should prepare for a 10-Year Treasury of about 3 ½ to 4%. Additionally, it’s reasonable to expect an increase in both permanent debt costs and construction costs. Higher prices for commodities, like steel, will hurt construction and infrastructure projects. The U.S. is already seeing more than 5% materials inflation in construction, and given these recent actions, it’s reasonable to predict this number could rise as high as 10%.

CRE Renovations Over New Construction

If the prices of construction materials increase as expected, this will change the landscape for how CRE professionals are investing in commercial real estate. An increase in raw material prices (aluminum and steel) would accelerate the trend for inflated construction cost that has already been going for years. Foremost, higher construction costs will make buying an enhancing existing commercial real estate the smarter investment over new construction.

Temporary Decrease in GDP

Even though the third quarter is normally the strongest quarter of the year, the addition of these tariffs could cause the GDP to fall below 3% this fall. However, this decrease in GDP will only be temporary if Trump prevails. It will take a patient economy to “ride the wave” until 2019 when it’s expected that GDP will reach 4% with exports rising.

Increased Inflation

In the short-term, these tariffs and counter-tariffs are predicted to add to the currently elevated 2.8% annual inflation. Let’s not forget that this inflation has already caused the Fed to raise rates in June and provides guidance for two more hikes in the second half of 2018.

What This Boils Down to for Commercial Real Estate

Commercial real estate (as well as residential real estate), is intricately linked to virtually every aspect of our nation’s economy; we often look to our construction and housing markets as a barometer to gauge current economic temperature, endurance, and vulnerability. The recent tariffs not only increase the costs of materials, but they may also ignite a global trade war, both of which can have a significant, negative impact on both local and national commercial real estate.

However there is one positive angle to consider. While much of the industry may feel the squeeze of elevated costs, the recent aluminum and steel tariffs don’t mean doom and gloom for the entire commercial real estate vertical. There is one sector that actually stands to benefit from the recent market flux: current property owners. Landlords of existing buildings won’t have to worry about increasing rents to cover new and unforeseen materials costs. These building owners can offer extremely competitive rent prices to potential tenants, ultimately undercutting the competition and stealing market share.

What other impacts do you anticipate Trump’s trade tariffs to have on the United States’ economy, within CRE or beyond? Do you feel short-term impacts outweigh long-term benefits or not?

Join in the conversation by leaving a comment below!

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Real Estate Trends to Impact the United States in 2018

Posted on December 27, 2017 by Mike Kushner in Blog, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Rapid technological advancements and significant demographic shifts significantly influence the real estate industry. These various factors like growing urbanization, longevity of Baby Boomers and differentiated lifestyle patterns of Millennials are changing the way people value real estate. Add into the mix macroeconomic and regulatory developments, and you have the perfect storm for some significant changes to come to the real estate market in 2018.

With the many changes that have already taken place in 2017, many real estate companies find themselves searching for ways in which they can gain a competitive advantage and drive top- and bottom-line growth in the New Year.

To achieve this, we must identify and monitor emerging trends that are likely to impact the economy moving into 2018. Take a look at the top trends that are shaping the U.S. real estate industry right now!

ECONOMIC OUTLOOK: Increasing interest rates could temper growth

Federal Reserve is likely to raise interest rates in the short-to-medium term. Volatile global markets have led to continued low interest rates, but that’s expected to come to an end in 2018. Higher interest rates are likely to increase mortgage costs and could deter real estate investments to some extent.
Gross domestic product growth will likely increase 2.5 percent in 2018. It’s the same as in 2017, but better than the 2.1% growth in 2016. The modest economic improvement could temper the pace of commercial real estate (CRE) transaction activity.
Improving labor markets and household wealth will boost consumer confidence. The U-5 unemployment rate which includes discouraged workers and all other marginally attached is expected to drop under 5 percent. The employment-to-population ratio is projected to peak in 2018, as retiring Baby Boomers may reduce the share of employed.

REGULATORY OUTLOOK: Greater compliance means greater cost

Increased compliance and administration costs will result from the new accounting standards on lease accounting and revenue recognition that will primarily impact real estate investment trusts (REITs) and engineering and construction (E&C) companies.
Risk retention rules will lower issuance of commercial mortgage-backed securities (CMBS). We are also likely to see a reduction in capital availability in secondary and tertiary markets.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 will ease REIT tax provisions and R&D tax credits for E&C companies, while increasing the flexibility to invest in startups for R&D experimentation. However, corporate tax reforms will reduce flexibility for corporations to spin off real estate assets into REIT structures.

DISRUPTIVE TRENDS: These factors are reshaping the face of CRE

Collaboration and Sharing.These sound like two positive trends, right? They certainly are for startups who utilize new platforms and business models like Airbnb or WeWork to reduce their real estate overhead. However, this type of collaboration and sharing of space is disrupting the way organizations lease and use commercial real estate space for their businesses. Traditional CRE companies will need to rethink their approach toward space design, lease administration, and lease duration in order to compete.
CRE data is becoming more ubiquitous and transparent thanks to technological advancements. The traditional brokerage model is being threatened by the increasing ease and efficiency of online leasing. Traditional brokers will need to diversify their services to include consulting and collaboration.
A growing demand for mixed-use developments as consumers prefer to “live, work and play” in proximity. This demand is the result of a shortage of workers with strong STEM skills, rising urbanization and Millennials’ preference for an open and flexible work culture. Companies trying to compete for this type of talent should choose office locations in areas that cater to the living and working environments preferred by their ideal candidates.
Rising demand for fast and convenient online retailing is disrupting the retail and industrial markets. Innovations in speed and mode of delivery (such as same-day delivery and e-lockers) will decrease the demand for large retail and industrial spaces. This trend will also cause a blurring of the lines between these two properties. For example, some retail space could double as fulfillment centers. To stay afloat, retailers will need to try different store formats to appeal to the consumer, while industrial properties should focus on smaller, more flexible spaces located near cities.
A change in how we get around will also change how we use real estate. With each passing year, more and more people rely upon “pay-per-use” vehicles and rideshare platforms like Zipcar, Uber and Lyft. We also get closer to self-driving vehicles. This major disruption to the entire mobility ecosystem will result in fewer people owning and driving their own vehicles, especially in urban areas. This will free up large parking spaces in prime locations that can be put to different uses. Real estate companies should begin to explore ways to reduce and repurpose parking space as a means to generate more income.

Over the course of the next 12 months, the U.S. commercial and residential real estate industry can expect to be hit with various changes and challenges. Some of these changes may have a favorable impact, while others could impose some serious setbacks. For real estate businesses to gain a competitive advantage and drive top- and bottom-line growth in 2018, they should take note of these emerging trends and work on developing a strategy now to react to the changing market, when the time comes.

What real estate trend do you think will have the most significant impact on the United States in 2018? Share your insights by leaving a comment below!

[Online Resources] Real Estate, 2017, 2018, buyers agent, central pennsylvania, commercial, demand, Economy, growth, industry, Mike Kushner, Omni Realty, prediction, regulation, residential, tenant representative, trends, united states

Current State of the U.S. Economy and Its Impact on Commercial Real Estate – Part I

Posted on December 7, 2017 by Mike Kushner in Blog, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

With the GOP’s proposed tax bill on its way to conference committee to reconcile the House and Senate versions, Omni Realty Group chatted with CoStar’s Regional Economist for the northeast, Robert Calhoun, about the state of the U.S. economy.

For more than a decade, Robert has been an influential source of economic analysis as it relates to monetary policy and real estate markets. He manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Through this two part series, Robert shares a wealth of knowledge and insight in his answers to our questions. Let’s take a look at what we can learn about the current state of our economy and the largest threats and opportunities we might encounter in 2018 – Be sure to stay tuned for part II from this series as we diver deeper into commercial real estate and the economy!

Omni: From your perspective, how has 2017 fared? Is the U.S. economy where you thought it would be?

2017 has been another solid year in this recovery. Through three quarters of 2017, real GDP growth has averaged about 2.2% year-over-year, roughly in line with the average since 2010. We are on pace to add another ~2mm jobs this year, and while the rate of job growth has slowed, it’s impressive that we’re still adding this number of jobs in the 8^th year of a recovery.

The unemployment rate is down to 4.1% as of October 2017, not only a new low for this cycle but the lowest level since 2000. I expected roughly average growth in 2017, as well as a gradual slowdown in job creation, but I didn’t expect the unemployment rate to fall as much as it has. This took the Fed by surprise as well.

At the end of 2016, the Committee projected the unemployment rate to reach 4.5% by the end of 2017, and I think I was also in that camp. The Fed expected to hike the Fed Funds rate 3 times in 2017, and they are on pace to do exactly that. This is notable: 2017 is the first year in this recovery where the Fed was able to hit their goals for the path of the Fed Funds rate.

Omni: What are your thoughts on Jerome Powell [President Donald Trump’s pick to be the 16th chairman of the Federal Reserve]?

In my opinion, what you get with Powell is monetary policy continuity, which is going to be important for a few reasons. 2018 has the potential to be a challenging year, so there is no reason to amplify that by bringing in a new Chair with radically different ideas about how policy should be implemented.

The Fed intends to begin slowly winding down its mortgage and treasury holdings starting in late 2017, and the taper is set to intensify throughout 2018. Markets are unsure how smoothly this will go, so sticking to the status quo should help smooth out potential volatility. Also, the voting composition of the FOMC swings decidedly more hawkish next year. Picking Powell, a centrist who is already well known to market participants, reduces uncertainty about how the Fed will act in 2018.

Omni: What’s the single biggest threat to the U.S. economy right now? Do you see an economic recession coming anytime soon?

While it would be easy to forecast a looming recession just because the expansion is 8 years old, I’ll paraphrase the Chair of the Board of Governors of the Federal Reserve, Janet Yellen: expansions don’t die of old age. I’m not seeing any alarming imbalances as we have in certain past cycles, and monetary policy is still remarkably loose given how deep we are into this recovery. The biggest threat is probably an unexpected revival of inflationary pressures, which would cause the Fed to raise rates faster, and would cause a spike in interest rates that would be damaging to the economy.

Omni: Generally speaking, has increased regulation been a good thing?

Any increase or decrease in regulation has the effect of moving us along the spectrum between ease of doing business and increased stability. I think I can state, without causing much of an uproar, that going too far in either direction is a bad thing.

Prior to the financial crisis, we had probably gone too far in deregulating certain parts of the financial system, so the increase in regulation that followed is no surprise. That being said, we’re already seeing several bipartisan efforts to reduce the strain from increases in regulation. The House recently passed a bill that would “clarify and amend the High Volatility Commercial Real Estate bank capital rule.” Also, Senate Banking Committee Chairman Mike Crapo (R-IA) is working with a handful of Democrats on a bill that would soften some parts of Dodd-Frank that are considered particularly hard on smaller regional and community banks. The government’s take on regulation is always a pendulum.

What particular insights did you find most compelling? Do you agree or disagree with Robert’s viewpoints? Start a conversation by leaving a comment below!

Now that we’ve taken a broad look at the health and future of the U.S. economy, stay tuned for part II of our interview series with Robert Calhoun to learn more specifically about how the economic climate and emerging technology stand to reshape the commercial real estate market in 2018 and beyond!

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Learn more about Robert Calhoun: Robert Calhoun is the Regional Economist covering the northeast for CoStar Group and is based in New York. Mr. Calhoun manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Before joining CoStar, Mr. Calhoun was a director of research at Annaly Capital Management, the largest publicly traded mortgage real estate investment trust. There he was accountable for the creation of proprietary research on the US economy, monetary policy and the regulatory environment to drive investment decisions across a portfolio of real estate-related assets that at times was larger than $100 billion. Mr. Calhoun graduated from Clemson University with a Masters in economics and a BA in business management. He also holds the Chartered Financial Analyst designation.

[Online Resources] Real Estate, 2017, 2018, Commercial Real Estate, costar, Economy, federal reserve, forecast, prediction, recession, recovery, regulation, robert calhoun, united states

How Federal Interest Rate Hikes Will Impact the Commercial Real Estate Market

Posted on February 3, 2016 by Mike Kushner in Blog, CPBJ Articles, Local Market, Trends No Comments

Note: This article was originally published by the Central Penn Business Journal. Click here to read the original version.

By now you have likely heard about the Federal Open Market Committee (FOMC) voting in December to raise the federal funds rate for the first time in almost 10 years. And if you haven’t, well, it’s time to take a crash course in what’s going on, and specifically how it will impact our local economy!

Mostly symbolic, this initial rate increase was just the first step in what will likely be a drawn-out process of monetary policy normalization. An important conclusion we can draw, is that it reflects the FOMC’s belief that the labor market is close enough to full employment.

While a 25-basis-point increase alone is not very significant, what matters most is where things head next. We can reason that the monetary policy, via the federal funds rate, will remain favorable in the near future. Also, current market conditions suggest inflation will remain below 2% for the next 10 years.

With a basic background as to what’s going on, let’s dive a little deeper into what this activity means for our economy, specifically for commercial real estate.

The Impact on Commercial Real Estate

It’s not the federal funds target rate or even the 10-year rate that impact commercial real estate the most, but rather economic growth and job creation. These factors have greater influence over lower vacancy rates and higher rental rates that really impact a building’s pro forma. Simply put, economic growth has a far greater influence on property values.

That’s not to say the commercial real estate sector hasn’t benefitted from the Fed’s massive injection of liquidity into the economy over the past seven years. Overall, prices have nearly recovered, and for some real estate segments, local markets prices actually exceed pre-recession peaks.

With the FOMC’s goal of normalizing interest rates, it’s reasonable to be concerned that rising rates will reduce investor demand for commercial real estate. However, I expect that commercial real estate prices and returns will continue to be attractive even in a rising interest rate environment.

More Than One Factor Impacting Interest Rates

There is more than one factor driving long-term interest rates. Take for example inflation (a major driver of longer-term yields) which is expected to remain low over the next decade. Additionally, our nation’s overall improving economic conditions, including a strong labor market, have helped to drive the Fed’s decisions. Nonfarm payrolls have increased by just more than 5.5 million jobs since the end of 2013. It is likely that 2014 and 2015 will be the strongest back-to-back job growth years since 1998 and 1999. Job growth is another major factor that continues to drive the improving leasing market fundamentals across the nation.

On a National Level

If we look to history for examples as to what to expect next, it’s that a rising federal funds rate has most often coincided with tightening commercial real estate markets and rising prices. Two similar instances have both been accompanied by rising office occupancy rates.

From 1993 to 2000 the federal funds rate rose from 3.0% to 6.5%. Office occupancy during that period increased from 79.6% to 90.9%. Similarly, from 2003 to 2007 the federal funds rate rose from 1.0% to 4.25% and office occupancy increased from 80.5% to 87.1%.

What we are currently seeing on a national level follows suit with these predictions. Commercial space is being absorbed, vacancy rates are falling and rental rates are rising. In third quarter 2015, the national office vacancy rate fell to 14.2%, its lowest level in seven years.

What’s Next?

According to F.N.B. Wealth Management, traders now believe the Fed is likely to hike rates just once in 2016, most likely not before September. This contrasts with earlier predictions that the Fed could move two or three times this year. As it pertains to commercial real estate, we should take this news in stride. Thus far, the federal interest rate hike has signaled a recovering economy and has not deterred investors and developers from diving into the market. An increase in absorption and rental rates and a decrease in vacancy rates are welcome side effects that are far more positive than what many other industries may be experiencing as a result of these economic changes.

For Central Pennsylvania’s commercial real estate investors, sellers and brokers, we should use what history has already taught us about the typical “tightening cycle” to our advantage to determine how we monitor and approach the market over the coming years.

Do you have an opinion on how federal interest rate hikes will impact the commercial real estate market at a local or national level? Join in the conversation by commenting below!

Note: This article was originally published by the Central Penn Business Journal. Click here to read the original version.

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Commercial Real Estate Predictions for 2015: Central Pennsylvania and National

Posted on December 19, 2014 by mike.kushner in Blog, Commercial Real Estate, Local Market, Trends No Comments

With the end of the year upon us, we can finally take a complete look at how the commercial real estate market has performed throughout 2014. However, 2015 holds an endless array of unknowns. How will the market perform? What other factors can we expect to impact commercial real estate? How will this differ nationally to locally?

These questions do not yet have answers, but we can offer our best predictions for what we can expect to happen within the commercial real estate market for 2015. Let’s take a look at where the current trends are likely to lead us in the coming months for both nationally and locally within Central Pennsylvania.

National Market Predictions:

Multi-Family: The rent market is predicted to remain in the landlords’ favor in 2015. Vacancy rates are expected to stay below 5 percent which will likely lead to an increase in rental rates, well above inflation. Apartment rents were projected to increase 4 percent in 2014 and are again expected to increase by 4.1 percent in 2015.

Office: Vacancy rates are predicted to fall from 15.7 percent to 15.6 percent in 2015, with rents expected to rise by 3.3 percent.

Retail: Experts predict that vacancy rates nationwide will drop from their current 9.7 percent to 9.5 percent in 2015 with average retail rents increasing by 2.5 percent.

Industrial market: Industrial real estate vacancies are expected to rise from 8 percent to 8.4 percent next year, while annual rents will continue to rise by another 2.9 percent.

Central Pennsylvania Market Predictions:

Multi-Family: The multifamily investment sales market will see continued appetite for apartment properties. Rents will increase to more than $1.25 per square foot and the market will continue to absorb new units as they get delivered. Overall, 2015 will be a good year for multi-family real estate.

Office: Market fundamentals continue to trend in a positive direction. The combination of measured new construction, tenant expansion and lessening office contractions will continue to contribute to restoring health to the Central Pennsylvania market. We expect asking rents to continue to stabilize and rise modestly in 2015. On the office investment side, we anticipate medical office space will continue to receive the most investor attention.

Retail: The retail sector will continue to see retailers moving into smaller spaces as they balance brick-and-mortar locations with online shopping. We also predict continued growth of fast-casual restaurants and an expansion of fast-fashion and discount retailers. Owners of power centers and grocery-anchored retail properties will rethink how they use space to fill vacancies in 2015 and beyond.

Industrial: Three main themes are emerging in the industrial sector that will follow into 2015: Rents will continue to climb; tenants will begin shifting to leasing light industrial, or smaller industrial properties in the 50,000 to 250,000-square-foot range; and companies leasing industrial space and landlords developing these properties will increasingly begin to provide more on-site amenities to employees. Development of mega distribution facilities will be limited by the availability of suitable locations.

These predictions for the New Year are what you might expect when looking at the current trends in commercial real estate. It’s important to think ahead as to how they might impact your business or the community in which you live. While some sectors are expected to contract, others show signs of promising growth. In addition to the future of the commercial real estate market, the success of 2015 still lies in our own hands. Best wishes for your best year yet – from your friends at Omni Realty Group!

Share your own predictions for the commercial real estate market in 2015 by commenting below!

[Online Resources] Real Estate, 2015, business, central pennsylvania, commercial, development, Economy, growth, industrial, Leasing, market, Mike Kushner, national, new year, office, Omni Realty Group, predictions, rates, retail, trends, united states