Dog Days of Summer 2016

By Brian O’Hear, Director, Calkain

As we work our way through the dog days of summer, we can take a moment to reflect back on the second quarter of 2016 and forecast for the upcoming months, sure to be fraught by the most highly acrimonious U.S. presidential campaign to grace social media pages. In particular, let’s take a look at the investment sales and debt markets.

General consensus supported by Calkain research shows cap rates for investment volume have remained steady for the first half of 2016. Albeit understandable given the equity market volatility, it is still clear there remains an appetite for the real estate triple-net product, especially for the private investor.

In this time of low interest rates, the case remains strong for real estate investors, given the longer triple-net lease terms and attractive spread over bond rates and 10-year T-bills, which are at historical lows of 1.5 percent as of the middle of August 2016. In some cases involving triple-net sales, we see the difference of 500 basis points between T-bills and average cap rates for triple-net-leased properties.

Given the slowdown in triple-net sales, changes in the U.S. debt market are stirring that potentially could have implications for the single-tenant market. We can all agree that commercial real estate fundamentals are stable, demand is meeting supply due to continued employment gains, and most property types are seeing rental increases. However, investors threw some caution to the wind in the first half of the year, in the face of proposed Fed increases and T-bill declines from calendar year 2015. The upcoming 2016 presidential election will not have any effect on interest rates through year-end 2016.

With headquarters in the Washington, D.C., area, Calkain Cos. and others always like to take a peek at the federal government agencies, along with the General Services Administration in any given presidential election year. Reflecting back to the presidential election of 2012 and the first half of 2016, we see that most federal government agencies have taken a low profile on leasing more space and choose mostly to remain in existing space, using renewals and short-term extensions as a forerunner of the election results. Moving forward, any likely government growth will have to be tied to specific programs, most notably cyber security (such as at the Democratic National Convention) and the growing market of health care technology.

What’s ahead for the balance of 2016? The Presidential election is weighing heavily on the minds of all American voters. Will rumors of change in the capital gains tax cause investors to delay buy or sell decisions or  hasten their decision? Regardless, real estate investments will continue to play a big part in the economy. Private capital is still seeking higher fixed-income yields, which triple-net investments satisfy, while institutions have monies allocated to invest for this year, the remainder of this year should prove to be an exciting time.