Real eState
Low interest rates tempting for investors in commercial real estate – The Globe and Mail
With superlow interest rates, prices rising constantly and a pandemic that has upended the way we work and shop, investing in commercial real estate right now can seem unusually tricky.
But it also can offer unusually good opportunities for those who navigate the low-interest environment and uncertain economy, people in the sector say.
The fundamentals remain the same in the commercial market even during these unusual times, says Jay Jiang, chief financial officer at Dream Office, a Toronto-based real estate investment trust (REIT) with holdings across Canada and in the U.S. and Europe.
“We stayed on the sidelines during the first part of the COVID pandemic. But in the low-interest environment we’ve been more active in acquisitions. We think the value of great office buildings in the best locations in the country will forever be valuable,” he says.
It’s true that work patterns are changing, with many people who have worked at home during the pandemic unsure of when or how often they will use the office. “But we think the office will remain a key part of the way companies work – a place for attracting, retaining and collaborating with employees,” Mr. Jiang says.
In its most recent statement, released on Sept. 8, the Bank of Canada said it’s keeping interest rates low and that this is not about to change soon. The bank has kept its key overnight lending rate at a bottom-scraping 0.25 per cent, concerned about a shaky economic recovery that saw Canada’s gross domestic product actually contract by about 1 per cent in the second quarter and inflation running above 3 per cent.
The bank is also continuing its quantitative easing program – increasing the money supply by about $2-billion per week.
This makes money available and cheap for commercial investors, yet on the other hand, no one is sure exactly how much and how strongly the economy will recover from the pandemic.
“It’s an interesting time because we’ve got some real investment risks in the sector because of the pandemic. At the same time, governments and the bank are trying to mitigate the risks,” says Justin Forgione, commercial broker at Rexton Commercial Realty Advisors Inc. in Toronto.
With low rates and a bank-backed pillow, it can be tempting for commercial real estate investors to go on a shopping spree, but they should still be prudent, Mr. Jiang says.
“It’s generally a good idea to buy good assets, but you need to manage your risk and not carry too much debt.”
— Jay Jiang, chief financial officer at Dream Office
“It’s generally a good idea to buy good assets, but you need to manage your risk and not carry too much debt. Interest rates may be low now, but it’s hard to speculate on where they will go eventually. If you keep your debt low and retain a lot of liquidity, you can refinance if things change.”
How the future of commercial real estate in Canada and internationally will unfold is still open to a wide range of speculation, but there is a lot of optimism.
In late February, CBRE’s 2021 Real Estate Market Outlook forecast that “office and retail markets, which bore most of the brunt of the pandemic, will find their footing, while industrial and multifamily [residential properties such as apartment buildings] are clearly benefiting from the reallocation of capital into defensive, stable sectors.”
Investment in industrial real estate, such as factories, warehouses and logistical depots, has been especially strong and active, CBRE said.
In a statement accompanying the report’s release, CBRE chairman Paul Morassutti said that “industrial [transactions] outperformed everything in 2020,” and that CBRE expects that by the end of this year, investors will snap up or plough funds into an additional 40 million square feet of office space.
The risk to commercial real estate investors is lower in Tier 1 markets, such as the Greater Toronto Area and Vancouver, Mr. Forgione says.
“If interest rates do go up, the correction won’t be as significant in these big markets as it would be in secondary or third-level markets,” he says.
Some types of commercial assets have become more attractive than others during the pandemic, Mr. Forgione adds.
“The move to working at home and to not going shopping at malls during lockdowns has been punishing some of these assets,” he says. On the other hand, in addition to the boost in value of logistical and industrial spaces that the CBRE describes, outdoor factory outlet commercial properties are doing well, he says.
As long as rates continue to be low, investors should expect that demand for commercial real estate will be generally high, boosting prices, Mr. Forgione says. Even vacant industrial-zoned land is relatively costly now, and rising construction labour and material costs, as well as general inflation, are keeping sale values high.
Mr. Jiang agrees. “Every month it looks like there’s a high water mark for prices, and then there’s a new one. Your land and building material costs are all more expensive, too,” he says.
When interest rates eventually do go up, smaller investors might be affected more severely than larger ones, says Benjamin Shinewald, president and chief executive officer for BOMA Canada, the umbrella group for building operators and managers.
Big institutional investors are able to hedge by holding big cash reserves even as they go shopping for properties, he says.
“The good news about our industry is that it is extremely well capitalized and it takes an extremely long-term view. That’s why institutions such as insurance companies and pension funds invest in us,” Mr. Shinewald says.
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Real eState
The real estate sector's unique view of 2024 — and what's to come – Yahoo Finance
This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
Despite a rough few days for the S&P 500, which is still comfortably in the green this year (up 6%), one sector of the stock market is feeling more pain than the rest.
The perception that rates might stay higher for longer is hammering the real estate sector, even as debate rages about how many times — if any — the Federal Reserve will cut rates this year.
The group is far and away the worst performer in the S&P 500 for 2024, down more than 10%. The bulk of those declines have come in the past two weeks, as Treasury yields have climbed to their highest level since November and investors traverse the acceptance phase that the hoped-for cuts are not on their way.
Now investors are faced with the question of whether to buy the dip or, to quote another market cliché, risk trying to catch a falling knife.
One real estate investor said the rent indicators she’s seeing in real time are encouraging on the inflation front. That’s in contrast to the much-criticized rental barometers that the Fed relies on.
“If you take into account real-time shelter costs, it’s much lower than what’s in the prints,” Uma Moriarity, senior investment strategist at CenterSquare, told Yahoo Finance. “We think inflation is trending in the right direction.”
That’s why she’s still confident in three rate cuts this year — a view, of course, that the market has been moving away from. It’s also why she’s still confident in real estate. That, plus the fact that stocks are relatively cheap.
Read more: What the Fed rate decision means for loans and mortgages
The reasons that real estate stocks suffer when rates are on the rise are twofold. First off, the companies tend to carry a lot of debt, and as rates go higher, it becomes more difficult to service or refinance that debt. Secondly, with relatively high dividend yields, the stocks compete with instruments like money market funds for investing dollars.
It’s traditionally been tough for real estate stocks to rally in the face of rising rates. But if Moriarty — and Citigroup — are right, they might not be rising for as long as the broader market anticipates.
Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9 a.m.-11 a.m. ET. Follow her on Twitter @juleshyman, and read her other stories.
Click here for in-depth analysis of the latest stock market news and events moving stock prices.
Read the latest financial and business news from Yahoo Finance
Real eState
Celebrity real estate agent Mauricio Umansky explains when housing prices will come down – Fox Business
Real eState
Real Estate Stocks Fall As Mortgage Rates Rise To 4-Month Highs: 'Inflation Is Proving Tougher To Bring D – Benzinga
Real estate stocks slid at Wednesday’s market open, weighed down by the latest disappointing data on housing starts and a spike in mortgage rates, darkening the outlook for the sector.
By 9:00 a.m. EST, the Real Estate Select Sector SPDR Fund XLRE had dropped by 0.3%. This marked its fourth consecutive day of losses and set a course for its lowest close since the end of November 2023.
The fund has also slipped below its 200-day moving average, a critical long-term benchmark, signaling that investor sentiment has turned negative.
The average interest rate for 30-year fixed-rate mortgages with loan balances up to $766,550 climbed by 12 basis points to 7.13% for the week ending Apr. 12, 2024, according to the latest figures from the Mortgage Bankers Association. This rate is the highest recorded since early December.
On Wednesday, the yield on a 30-year Treasury bond, a key benchmark for long-term mortgage rates, traded at 4.75%, at the highest since mid-November 2023, as Fed Chair Powell admitted that there has been a lack of progress in the disinflation trend.
Chart: Real Estate Stocks Fall Below Key Long-Term Moving Average As Inflation Bites Again
Weaknesses In Multifamily Segment Continue
Joel Kan, MBA’s Vice President and Deputy Chief Economist, explained the rise in rates, stating, “Rates increased for the second consecutive week, driven by incoming data indicating that the economy remains strong and inflation is proving tougher to bring down.”
Despite the uptick in mortgage rates, there was a 3.3% week-over-week increase in the Market Composite Index, which measures mortgage loan application volume.
Kan further noted, “Application activity picked up, possibly as some borrowers decided to act in case rates continue to rise. Purchase applications were the primary driver of this increase, although they are still about 10% lower than last year’s levels. There was a slight uptick in refinance applications, mainly due to a 3% rise in conventional applications.”
Chart: US 30-Year Mortgage Rates Rose To The Highest Level Since Late November
The real estate market’s challenges are linked to affordability and a shrinking availability as the supply of new homes falls.
Andrew Foran, an economist at Toronto Dominion Securities, commented on the trend in home building, “Homebuilding activity moderated in March as weakness in the multifamily segment persisted and the single-family segment gave back most of its considerable gain from the prior month.”
Data revealed a 14.7% month-over-month decline in housing starts in March, with the figures dropping to 1.32 million annualized units, significantly below the anticipated 1.49 million.
Both the single-family and multifamily sectors experienced declines, with single-family starts down by 12.4% (or 145,000 units) and multifamily starts plummeting by 21.7% (or 83,000 units). This retreat in multifamily starts marked the lowest level since April 2020.
Additionally, residential permits decreased more than expected in March, falling by 4.3% month-over-month to 1.46 million annualized units. This included a 5.7% drop in single-family permits—the first decline in fifteen months—and a 1.2% reduction in multifamily permits.
Rising & Falling
The weakest performers among real estate stocks with a market cap of at least $1 billion on Wednesday were:
Name | 1-day %chg |
---|---|
Prologis, Inc. PLD | -6.55% |
First Industrial Realty Trust, Inc. FR | -3.33% |
STAG Industrial, Inc. STAG | -2.89% |
EastGroup Properties, Inc. EGP | -2.89% |
Rexford Industrial Realty, Inc. REXR | -2.35% |
Those showing the highest gains were:
Name | 1-day %chg |
---|---|
SL Green Realty Corp. SLG | 3.18% |
Opendoor Technologies Inc. OPEN | 2.55% |
Medical Properties Trust, Inc. MPW | 2.49% |
eXp World Holdings, Inc. EXPI | 2.32% |
Vornado Realty Trust VNO | 2.25% |
Now Read: Best REITs to Buy in April
Image: Midjourney
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