Touching Base on the Commercial Real Estate Recovery

06-Jan-2015

I like this.

By

An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

Posts by
Liu-Yue Lam’s Website







By Ian Goltra of Forward, Advisor Perspectives,

Considering the recent upswing in commercial real estate prices and traded real estate stocks, in what inning is the commercial real estate recovery? Could there be extra innings? Prior to the most recent decline in real estate, downturns in commercial real estate cycles have historically been caused by supply shocks—developers putting up new buildings until they (or their banks) ran out of money. However, the most recent downturn that took place during the 2008 financial crisis was a demand shock. As a country, we didn’t have an overabundance of buildings, we had too few employees needing places to work and not enough consumers needing places to shop.

Employment trends now indicate that demand is recovering (see first chart below). As of June 30, 2014, the number of employees being added annually to nonfarm payrolls has returned to precrisis levels. All of these new employees need places to live, shop and work, which fuels the demand for multiple property types: apartments, retail malls and shopping centers, and office buildings. However, despite an increase in demand, construction of new buildings as a percentage of existing inventory—new supply—remains muted (as shown in the second chart below). There are exceptions to this supply trend, such as the number of new office buildings in San Francisco and new apartments in Washington D.C., but the takeaway is that the length of the current upturn will likely be determined by how long the economic recovery continues, at least here in the U.S. If the recovery stalls, and employment trends reverse, commercial real estate will no doubt suffer.

Downturns of years past
First, a brief history primer is in order. In the 1970s and 1980s, tax laws allowed for accelerated depreciation of commercial real estate owned by limited partnerships, so tens of billions of dollars flowed into these vehicles during this period of time. This capital was often combined with very high levels of leverage in order to amplify the tax benefits for limited partners. Additionally, savings and loan officers provided debt capital (credit) to developers who seized the opportunity to build new buildings that often lacked one critical component: tenants. Then came the Tax Reform Act of 1986, which wiped out the accelerated real estate depreciation, and suddenly limited partners and other investors witnessed the vaporization of their investments. Without tax benefits, many partnerships did not have financial reasons to exist and many of their commercial properties ended up in foreclosure on a previously unseen scale.

Savings and loan institutions took on massive amounts of “real estate owned”—a term used to describe a class of property owned by a lender after an unsuccessful sale attempt at a foreclosure auction. Eventually, the Federal government stepped in and created the Resolution Trust Corporation (RTC) to sell off the troubled real estate on the balance sheets of the savings and loan institutions at discounted prices. By the mid-1990s, now-legendary commercial real estate investors like Sam Zell had assembled portfolios of real estate acquired from the RTC at deep discounts to original construction costs. In the ensuing years, as these buildings recovered in value, the second generation of investors amassed great fortunes. Ultimately, this time period demonstrated what it takes to work through the excesses of too much real estate built for tax benefits as opposed to sound investment criteria.

A starkly different supply picture
As of the end of September 2014, new supply, shown in the chart below as new construction (starts) as a percentage of existing inventory, is just over 1.1%. This percentage is near the lows since 1970 (indicated by the blue line in the chart below). The green line is the aggregate amount of starts, in millions of square feet across property types. New building starts are running at roughly one-third of what they were when they peaked in the mid-1980s. These buildings comprise just over 850 million square feet, as compared to 1.8 billion square feet almost thirty years ago.

Taken together, the supply and demand data suggest that so long as the economic recovery continues, commercial real estate may in fact be in the “early innings” of a cyclical upturn. However, there are very real macroeconomic risks and challenges that could impede the recovery cycle. These risks include direct and indirect impacts of international conflicts on the U.S. business environment and unwinding never-before-seen levels of central bank intervention. But, if economic stability and modest growth domestic product (GDP) growth can persist, we believe there is real potential for an extended growth phase that may reward long-term commercial real estate investors with growing asset values and competitive rates of return.

RISKS

Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results.

This material is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinion are subject to change without notice.

Investing in the real estate industry or in real estate-related securities involves the risks associated with direct ownership of real estate which include, among other things, changes in economic conditions (e.g., interest rates), the macro real estate development market, government intervention (e.g., property taxes) or environmental disasters. These risks may also affect the value of equities that service the real estate sector.

© Forward

 

Tags: , , , , , , , ,
Post a comment or leave a trackback: Trackback URL.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

Subscribe without commenting