COMMERCIAL INVESTMENT REAL ESTATE
10 September | October 2017
W
hile core market pricing has held steady since
2015, for the past 18 months a softening in sec-
ondary markets has occurred. This slump may
preview what will happen in all markets. For
example, higher yields are available in suburban office parks,
although the flight to the urban center to attract millennial talent
may start to shift this dynamic.
Overall, multiple metrics and indicators suggest that com-
mercial real estate properties are in or nearing a late stable stage
of the market cycle for most property types in nearly every local
market. Many property types in markets such as Washington,
D.C., and Houston appear to have surpassed peak conditions at
this point, though there is no obvious reason to expect a signifi-
cant downturn.
After a sharp rise in yield on the benchmark 10-year Trea-
sury bond, interest rates have stabilized and, in fact, come down
this year on both an absolute and effective basis as spreads have
tightened. The economy continues to plod along at a 2 percent
estimated annual gross domestic product growth rate.
In most markets, supply appears to be met with commen-
surate demand, although a few markets such as multifamily in
Los Angeles and office in San Francisco are exceptions. Finally
hobbled by regulation, the banks continue to prune their port-
folios and to be tentative about approving new loans, particularly
construction loans.
Even on relatively stable assets, bank lenders rarely offer more
than 60 percent financing, so mezzanine players and alternative
lenders have had to fill the gap. This situation differs from 2006,
when anybody who could fog a mirror got a loan, often at 85
percent loan-to-cost, for the senior tranche.
Unbalanced Retail
Retail is the notable exception to this relative stability. Almost
every day, headlines of store closings and national retailers filing 3DSculptor/Getty
Images
MARKET
FO R ECA S T
Late-Stage Cycle
More investors than investment opportunities exist, but the up cycle is
nearing its end.
by Marty Caverly