Slowing economic news in some quarters may have some nerves fraying, but commercial real estate (CRE) tells a somewhat happier story. Mortgages may be married to financial crisis in the minds of many Americans. However, while obviously linked, they’re not quite joined in holy matrimony… and CRE is in a far more blissful state, judging from where the smart CRE money, both debt and equity, is flowing. So think of U.S. GDP measures and commercial real estate indicators more as pretty good friends who hang out together…sometimes. To understand the overall economic picture, you really should consider both.
As to economic measures: There’s been a lot of talk lately about a potentially slowing U.S. economy, with advance reports indicating a decline in GDP growth in the third quarter, and a drop in profit and revenue at S&P 500 companies, for the first time since the recession.
Looking solely at these broad economic measures may obscure what’s going on. So let’s lift the curtain to see what commercial real estate is doing when apart from its “friend,” based on a GDP analysis released last week by the Commerce Department’s Bureau of Economic Analysis:
▪ The finance and insurance industries were among the leading contributors to the increase in U.S. economic growth in the second quarter, with the measure of their contribution to the gross domestic product, or real value added, increasing 12% in Q2. That’s actually the opposite direction finance and insurance were heading before the recession, when a government report found that a downturn in those industries “accounted for nearly half of the slowdown in economic growth in 2007.”
▪ The real value added for construction, an industry without which real estate (whether residential or commercial) could not exist, increased 9.8% in Q2; contrast this with a 12.1% decline in 2007. Meanwhile, construction’s real gross output, the measure of an industry’s sales or receipts, increased 23.5%, its eighth quarterly increase in the last nine quarters, and construction has added 233,000 jobs over the past 12 months, according to the Bureau of Labor Statistics.
We see, then, that when we peek behind the scenes, the decline in GDP growth doesn't extend across the board. Now let’s take a look at where the smart money is going. And please recall that commercial real estate isn’t just for real estate specialists anymore. Private equity funds and alternative lenders have been getting into the game with relish.
The recent purchase of Manhattan’s biggest apartment complex,Stuyvesant Town and Peter Cooper Village, for $5.3 billion? That was private equity giant Blackstone, along with Ivanhoe Cambridge, the real estate arm of a leading Canadian pension fund. Earlier this year, Blackstone also acquired the real estate investment trust Strategic Hotels & Resorts for $6 billion (including debt) and, along with
It isn’t just Blackstone, though. As a whole, Q3 showed the largest amount of capital ever raised in a single quarter for closed-end private real estate funds – $37.5 billion – according to Preqin, which collects data on alternative assets.
In CRE, debt accounts for a majority of the financial picture – so in addition to equity, it’s key to look at what lenders are up to on the debt side of the ledger. Most equity investors won’t put down their money without a commercial mortgage provided by banks or other lenders.
So have lenders been issuing commercial real estate loans? In sum: yes, and in spades. According to data from CRE big-data firmCrediFi Corp. (full disclosure: that’s my company), in New York City, for instance, an estimated $30.82 billion in loans were issued in the first half of this year, over $1 billion higher than the same period last year. Regulated players drive most of this lending, so if restraining regulatory changes have worked, this isn’t irrational exuberance.
Top loans provide another indication – robust lending markets in both New York and Boston saw particularly large loans issued this year for their respective markets.
There are also other indications that commercial real estate is not slowing down. This year has seen strong and consistent leasing demand for industrial real estate, low vacancy rates for office buildings, and rising equity and debt investment in retail, according to commercial real estate services firm CBRE.
As for the hospitality and multifamily segments, PKF Hospitality Research reported in September that the U.S. lodging industry’s per-unit return on investment rose by 14.6% over last year, and multifamily vacancy rates have fallen to their lowest level in two decades, going hand in hand with soaring rents, according to a report by Harvard’s Joint Center for Housing Studies.
So yes, there are some signs of slowing overall economic growth (though even there, keep in mind that unemployment is down and job gains went up in October). But let’s remember that it takes two to walk down the aisle toward either bliss or crisis, and CRE is on its own path… and having a pretty good time of it.
