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First Quarter 2016 Real Estate Update: Marcus and Millichap

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This article is sponsored by Marcus & Millichap.

Across the country and across all sectors, there was a decrease in “activity” and transaction velocity in the first two months of 2016 from the strong pace of 2015. There does not seem to be a consensus on the reasons why, but industry professionals cite severe-stock market volatility, the drop in oil prices to the lowest levels in years affecting stock valuations and the employment sector. Other reasons include volatility in the CMBS capital markets, and simply investors “taking a breather” from the frantic pace of 2015 in order to get a handle on all the acquisitions made in the year.

That said, everyone agrees that the United States economy still has strong basic fundamentals. The stock market recovered in March, employment gains are steady, inflation low, and interest rates are still low. GDP growth is projected to be steady and will continue to be well above 2 percent. Consumer spending also remains stable and may even grow in 2016. Following the addition of 2.7 million jobs in 2015, employers will maintain the steady pace of growth by creating another 2.5 million positions in 2016. Job creation will be broad-based, with only natural resources and mining and some segments of manufacturing likely to lag the overall trend. Secondary and tertiary metros were late to join the economic recovery but will record solid hiring gains in 2016. Led by the highly-digital millennials, online and mobile shopping has emerged as the leader in retail sales growth. Electronic shopping rose 10.2 percent in 2015, easily outpacing the 3.3 percent bump in core retail sales.

National Apartment Overview

New rentals were absorbed in substantial numbers last year, contributing to a decline in national vacancy to 4.2 percent. Elevated completions will exceed demand and underpin a nominal increase in the U.S. vacancy rate in 2016. Further expansion of U.S. payrolls will generate new rental households and support a 5 percent jump in the average effective rent this year. Positive demographic trends in the millennial and baby boomer segments will also spur new demand and underpin solid asset operations. Developers will complete 285,000 units in 2016, surpassing last year’s total of 250,000 rentals. Multifamily starts remained elevated nationwide, pointing to additional supply pressures over the near term. Several metros will record supply-induced vacancy increases this year.

Space demand will once again exceed additions to supply this year, supporting a 30-basis-point decline in vacancy to 5.9 percent, the lowest year-end level in 16 years. Tighter vacancy will underpin rent gains of 2.8 percent, the largest rent appreciation since 2007. This year, developers will complete 46 million square feet, representing a modest decline from last year’s total, but the pipeline of planned projects is increasing.

National Office Overview

Office properties were late to reap the benefits of the economic recovery, but last year’s steady improvement in performance provides momentum into 2016. Growing payrolls pushed more tenants into bigger spaces in 2015 and helped lower the U.S. vacancy rate. Tightening availability placed owners and tenants on more equal footing last year, blunting the edge previously wielded by tenants in lease discussions and supporting a more vigorous pace of rent growth. Last year’s only modest drop in the vacancy rate, however, likely reflects the continuing reduction of the workspace per employee ratio. Since the pre-recession peak, a 5 percent rise in office-using jobs has translated into only a 4.3 percent bump in occupied space. New office construction has lagged throughout the recovery and may not be sufficient to relieve unmet needs of tenants seeking new spaces with modern amenities. Many office users took advantage of lower rents early in the recovery to relocate to buildings with the features and amenities they desire, but they now face constricting availability in suitable properties.

Limited completions will support a slight drop in the vacancy rate during 2016, although challenges in matching tenants to available spaces may intensify. Growth in office-based services will support additional spending on staff expansions that necessitate larger workspaces or opening new locations. Professional and business services employment, encompassing a range of office-intensive fields including law, accounting and engineering, sits at an all-time high and is pressuring existing layouts. Job openings here also remain elevated, signaling potential new hiring in 2016. Thus far in the office market upswing, financial-services payrolls have not regained their previous high, and vacant spaces related to deficits in fields related to residential real estate linger.

2016 National Retail Overview

New Store Openings to Trim Vacancy:
Retailers moved into an additional 66 million square feet of space nationwide in 2015, slicing the vacancy rate 30 basis points to 6.2 percent.

Restrained retail-property development has characterized the post-recession period and supported a steady drop in vacancy, a trend that will persist in 2016. Nearly 30 percent of this year’s projected square footage will come online in five markets: Houston, New York City, Dallas/Fort Worth, Chicago and Orlando.

Sales at Inline, Anchor Retailers Rise:
Although online sales continues to make inroads, traditional inline retailers and anchors posted respectable growth in sales last year and are well-positioned for 2016. Sporting-goods and building-materials stores fared well, registering growth in receipts of 9.1 and 5.0 percent respectively, while sales at apparel and furniture stores also grew more than 2.0 percent.


Marcus & Millichap
Since 1971, Marcus & Millichap (NYSE: MMI) has been the premier provider of investment real estate brokerage services. The foundation of our investment sales is the depth of our local market knowledge. Our 44-year history of maintaining investor relationships in local markets enables us to be the best information source and transaction service provider in North America.

In 2014, Marcus & Millichap closed 7,667 investment transactions for private and institutional investors. By closing more transactions annually than any other firm, our investment professionals provide clients with an unparalleled perspective on the investment real estate market locally, regionally and nationally. Included in these transactions were shopping centers, office and industrial buildings, apartment properties, single-tenant net-lease properties, hotels/motels, seniors housing facilities, healthcare/medical office, student housing, manufactured home communities, self-storage facilities, golf and resort properties and land.

Marcus & Millichap has established itself as a leading and expanding investment real estate company with over 1,500 investment professionals in 80 offices throughout the United States and Canada.

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Transforming Saudi Arabia’s Capital Markets

This article is sponsored by State Street.

KEY POINTS

– Vision 2030 and the Aramco privatization mark a decisive point to advance Saudi Arabia’s financial sector — a critical ingredient to the country’s economic transformation

– Saudi’s “Financial Triad” remains partially incomplete with a sound banking system and a rapidly emerging equity market, but an immature bond market.

– The privatization of Saudi state assets (including Aramco) could deliver a boost to the depth and sophistication of the Saudi equity market and — if cleverly designed— have positive spillover effects into other areas of finance and policy.

– The timing is ideal to launch an accompanying systematic drive to build local currency bond markets, which is a prerequisite for achieving the broader economic goals of Vision 2030.

Saudi Arabia’s Vision 2030 is remarkable in its aspiration to engineer far-reaching economic transformation. As a global asset manager, we note that one of the three pillars of this vision sets out the aim to make the country a “global investment powerhouse.” 1

While Saudi Arabia has a strong legacy as a sovereign investor in foreign markets, this ambition also requires its local financial system to deepen across all sectors. Strong capital markets work together with a banking system to channel investment and ensure efficient capital allocation across the economy. In the absence of such channels, many worthwhile business ventures never take place, capital is misallocated and underutilized, and economic growth remains below its potential.

To read the full study please click here.

1 Foreword to Vision 2030, http://vision2030.gov.sa/en/foreword.

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Sovereign Wealth Funds as a Driver of African Development

This article is sponsored by Quantum Global.

Sovereign wealth funds (SWFs) are becoming important sources of development in many countries. African SWFs have been growing in recent years, as many countries joined the international trend in establishing SWFs, while many others are preparing to join. Growth of SWFs has been driven by rising commodity prices until 2014 and improving economic growth rates. At the same time, Africa continues to face a number of development challenges, raising the question of whether SWFs can play a role in fostering economic development on the continent. This paper analyses the dynamics and role of SWFs in promoting development in Africa. The paper notes that SWFs can play a more active role in Africa’s development by bridging the infrastructure funding gap, supporting industrial development and economic diversification, reducing macroeconomic volatility and enhancing intergenerational equity. For SWFs to be effective in delivering their mandates and supporting economic development, they need to have clear goals and objectives, improve their governance and transparency frameworks, improve their risk management frameworks and embrace the Santiago Principles. African governments need to develop more attractive frameworks and climates for SWFs to invest in the continent, especially in sectors that contribute more directly to addressing Africa’s development needs.

To read the full study please click here.

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Collateral: The New Performance Driver

This article is sponsored by BNY Mellon.

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In 2017, the global buy-side community faces considerable liquidity and funding pressures, stemming from market and regulatory reforms that are causing disruption. As a result, access to high-quality collateral, funding and liquidity is not only a pressing concern but has emerged as the essential new performance driver for the buy-side.

This disruption is the result of two opposing forces. Stringent regulatory requirements are forcing market participants to seek collateral — generally of high quality — in order to secure trading exposures. At the same time, the sell-side — or dealer-sponsored financial plumbing used to supply liquidity and collateral to the market — is experiencing challenges due to Basel III capital and liquidity constraints.

A major concern among multiple buy-side firms is that the next market-stress event will occur not because of a lack of collateral in the financial system but rather due to the inaccessibility of this collateral.¹ This scenario is forcing firms to reevaluate their collateralized trading portfolios, recalibrate asset allocation strategies and in some cases review the investment products offered to end clients.

This paper presents the findings from BNY Mellon–PwC outreach to senior buy-side executives from over 120 global firms conducted during the first quarter of 2017. It provides insights on demand-supply imbalances that are being experienced by buyside firms and the possible solutions they are exploring in response to fears that ready access to liquidity and high-quality collateral may become scarce in the years ahead.

The picture that emerged from these discussions was one of a buy-side community both grappling to adjust to its new collateralized trading obligations as well as striving to secure access to sustainable sources of funding and liquidity.

To read the full study please click here.

1. Collateral can be inaccessible due to decreasing velocity of collateral, which indicates how much, on average, a single dollar of collateral is reused over a period of time. This is analogous to the concept of “velocity of money.”

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