Q10 KDH Vice President David Holland, President-Elect of the Aggie Real Estate Network (AREN), helped plan and organize the recent 2019 Annual AREN Conference at the Marriott Marquis in downtown Houston. In addition to seminars and speakers, the conference activities included a happy hour, dinner, golf tournament, and Astros vs. Rangers baseball game. Q10 KDH is proud to be a sponsor of the annual AREN Conference.
Keith Read, Q10 KDH Associate, compiled the following notes from the speakers’ presentations and panel discussions at the conference.
Will McIntosh, Ph.D – Global Head of Research – USAA Real Estate Company
Overview: Expects to move into a recession in 2020 with 10-15% value corrections. Last 7 times we had a yield-curve inversion we had a recession 5-17 months later. Global slowdown, tariffs, tax cut burn-off, and slowing consumer spending are all indicators.
Interest Rates: Expects that rates will continue trend downward and the Fed Funds Rate could end up at 1.75 over the next year. Currently $295 billion in dry powder for CRE with global capital chasing US CRE and gov-backed investments– thus keeping the treasures low.
RE Market: Supply is very high as well as demand in gateway and growth markets, vacancy is up but not above historical averages in most major markets. Taking defensive stance. All-time highs in transaction volumes and price levels across many major markets with industrial and multifamily leading the way.
Returns: Core RE returns stabilizing and moderating in all major food groups except industrial. NCREIF has a 6.72% total return on CRE vs 8%-9% historical average.
Institutional: Investmentcontinues to move down the risk-curve toward value-add and opportunistic. Institutions are forecasting core returns to drop around 5%.
Demographics/Jobs: Slowing employment growth from 200,000/mth to 165,000/mth, believes unemployment has bottomed out.
Cap Rates: Historically are 234bps over treasuries and are close to “overpriced”. Evidence that they are moving upward.
Investment Stance: Focusing on industrial logistics, multifamily, government office, grocery anchored, debt platforms, and underutilized malls in A locations.
Wally Reid (JLL), Peter Barnhart (Caldwell Companies), Jonathan Brinsden (Midway Companies), Jacob Milligan (Prologis), and Aaron Sherman (Stillwater Capital)
Cost: Cost is outpacing rent growth, labor markets continue to strain feasibility, and developers are showing 5% cost increases every 6-9 months.
Trends: Mixed use is difficult to off-load with only 3+ major institutional buyers in market. Very difficult to have comps for mixed-use.
Strategy: Office is becoming hospitality – some “renting by the desk” becoming more popular for flexibility. Institutional tenants moving into the co-working space to attract talent and gain flexibility. Studies showing that 15-20% is seen as most efficient allocation of co-working leasable area.
HFF/JLL: Began tracking high net-worth families looking for cash yield. Trying harder to tap into this market.
David Ellis, Ph.D – Texas A&M Transportation Institute
Overview: Lowering the demand curve is the “3rd generation of transportation”. There are many more opportunities to NOT make a trip while accomplishing the same task or purpose (think blockbuster). There is major trend in all age cohorts, except for 70+ year olds, demonstrating less people with driver’s licenses. The number of 16 year olds with licenses has been cut in half from 1983-2014. Telecommuting is up 115% since 2005 and carpooling is down -5%.
Capital Markets Panel:
Chad Owens (Northmarq Capital), Lynn Carr (Wells Fargo), Jimmy Caple (Argentic), Catherine Justice (Freddie Mac), Chris Suttle (USAA Real Estate)
LIBOR: General consensus is that SOFR will replace LIBOR. Most are adding general language to docs so that the transferring process is easier in the near future. Most are working on ‘triggers’ in loan docs for the replacement metric.
Trends: More borrowers wanting fixed rate debt. Freddie Mac went from 50/50 fixed/floating in 2017 to 76/24 in 2018/2019. Debt funds becoming more competitive and are able to utilize clo market for leverage.