The transactional volume in Q12016 has been light when compared with last year; will 2016 be as frothy as 2015? Experts took to the stage at I.CON: Trends and Forecasts, led by Mary Lang, senior vice president, Prologis, Inc., to share their views.
“Activity in 2015 was unusual, with some heavy transactions,” said Rusty Tamlyn, SIOR, managing director, HFF. “And it’s typically a loaded end of the year, so there’s still some to come although the anticipation is that the sales volume will be softer this year.”
Nicholas Pell, managing director and head of investments with Gramercy Property Trust, said that his company is a public REIT investing capital for traditional institutional investors, so they can be selective about the products and markets in which they invest. What Gramercy has identified in the market is a lot of Class B product and what he calls “fringe” product that sometimes falls off the screen of other investors. They are finding that the returns can be greater, particularly with lease duration.
John Thomas, senior managing director with CBRE Global Investors, says that business and consumer confidence have improved significantly since the global financial crisis, and economic growth has been supported by accommodative monetary policy. Logistics properties are delivering far stronger returns than other product types. Looking ahead, businesses are concerned about returns and global events.
Speakers talked about what the Federal Reserve might do about interest rates, and what that means for real estate pricing. The relatively few historical instances of rising rate environments have produced missed effects on cap rates. Thomas says that “capital is loaded, and interest rates in the U.S. are higher than in other countries.” An expected modest increase will come, but shouldn’t trigger a contraction in cap rate expansion. Capital flows are a factor in determining the extent of repricing.
Uncertainty about the November presidential election could have an effect on investment and the industry, but the panelists weren’t worried. “Two candidates with high disapproval ratings is tough,” said Tamlyn. “But 536 people [the president plus Congress] aren’t going to derail the strongest economy in the world.” The global political upheaval is far outweighing any domestic strife, said Thomas, agreeing with Tamlyn that the U.S. has the best economy in the world.
Cap rates have dropped to historic lows in most, if not all, of the U.S. markets. So where is there relative value in the markets today? Tamlyn says low cap rates have driven investors into secondary cities, and some are doing development themselves to build the kind of product they want to own long term. “The four letter word many had banished forever – flex – is yielding some more positive returns.”
Industrial fundamentals have never been better, and the influx of foreign capital has never been stronger, Lang said. The consolidation across companies has been unusual, but it’s lessened the fragmentation across the industry. Have those shifts had an impact? Tamlyn said some groups are recycling or reselling non-core assets, including GLP, or selling older B-product. Public REITs are 10-20 percent of the total market as opposed to retail, which is about 70 percent public REITs.
Pell says diversification in product gives companies greater access to capital, but as a company gets bigger through acquisitions and transactions, it’s harder to keep growing at that pace.
As far as capital flow into the U.S. industrial market, Thomas says capital is fungible and goes anywhere looking for a return. CBRE has developed a proprietary research tool that models cities and product types to predict what will happen in the markets, and they’ve applied it to about 60 countries. “Industrial shows up very high in most countries, especially the U.S.,” he said. “The volume of industrial deals in Europe are tiny.”
“Right now industrial is a darling in the industry,” said Tamlyn. “In industrial, you aren’t going to double your money, but you’re not going to lose your money. It’s conservative and doesn’t eat your cash flow. It’ll be interesting to see how the industry evolves.”