{"id":1004145900,"date":"2016-06-15T07:51:47","date_gmt":"2016-06-15T15:51:47","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004145900"},"modified":"2020-04-23T06:20:33","modified_gmt":"2020-04-23T14:20:33","slug":"another-new-normal","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/another-new-normal\/","title":{"rendered":"Another New Normal"},"content":{"rendered":"

By Ken Riggs, President, Situs RERC<\/p>\n

\"Ken<\/a>

Ken Riggs,<\/p><\/div>\n

Heading into midyear, investors had been looking forward to a stronger,\u00a0more consistent forecast for the second half of 2016. Instead, we are filled with increased uncertainty, contradictory economic growth indications and dislocation in the capital and real estate markets, topped off by this past weekend\u2019s massacre in Orlando and the implications it may have for\u00a0the political environment and national security. As we look ahead, it appears the rest\u00a0of 2016 will find investors focused on managing through the lack of confidence, lumpiness and mixed messages being signaled globally. Unfortunately, this is becoming our new normal.<\/p>\n

Given the improvement in the housing market and strong\u00a0auto sales, one would have expected the multiplier effect to take hold, giving the economy strength in numbers and consensus forecast. However, economic growth was less than 1 percent in first-quarter 2016, although consumer spending increased in April<\/a> by the fastest pace in almost seven years, according to the Commerce Department. Additionally,\u00a0job growth plummeted to a seasonally adjusted 38,000<\/a> in May, the slowest pace in more than five years, according to\u00a0the Bureau of Labor Statistics, and consumer confidence dipped for the second month in a row.<\/p>\n

The capital market in general remains quite disciplined, despite the Federal Reserve\u2019s easy money policy for the past eight years. But yields on the 10-year Treasury are not increasing, and regardless of the increase in short-term rates last December and another possible increase later this summer, rates have declined more than 60 basis points over the past year, according to the\u00a0Treasury Department. This uneven behavior and mixed results across the economy, capital markets and political environment are becoming our new expectation. The question is for how long.<\/p>\n

\"Situs<\/a>From an alternative investment standpoint, commercial real estate has in recent memory been the go-to investment when uncertainty dominates the landscape. The Situs RERC<\/a> CRE vs. Alternatives Preference Index demonstrates institutional investors\u2019 changing preferences for commercial real estate compared to stocks, bonds and cash (see chart at left)<\/i>. The baseline is 100, which is where investors feel that, on average, they all\u00a0are equally attractive. A score over 100 indicates investors\u2019 preference for commercial real estate, and a score below the neutral point indicates the opposite.<\/p>\n

The\u00a0Index has been trending downward over the past two years, and in first-quarter 2016, the index reading was 117, down from 123 in fourth-quarter 2015. Over time, the high reading (128) occurred in first-quarter 2014, and the low reading (89) occurred during the credit crisis in first-quarter 2009.<\/p>\n

According to the Index, investors still prefer commercial real estate over stocks, bonds and cash, but as commercial real estate continues to mature as an asset class, there is less room for capital appreciation. As a result, returns will be increasingly available through rental income only, and while risk-adjusted returns remain rational, total returns for commercial real estate have been declining. Make no mistake\u2014there is a deceleration in this force behind commercial real estate investment pricing and values, as shown by the decline in ratings for commercial real estate over the past year and a half (see chart below)<\/em>.<\/p>\n

\"Situs<\/a>Even so, investors in commercial real estate are positioned by the nature of the asset class (and maybe some of their own doing) and have a much better chance of navigating through this new normal than do investors in other asset types because:<\/p>\n