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.
Through the looking glass
This article is sponsored by Dominion.
The decision taken by the British Government to require the 14 British Overseas Territories (BOTs) to establish Public registers of the beneficial owners of Companies registered in these territories has so far created a divided reaction. The BOTs, have generally taken the view that it is grossly unfair for the UK Government to use ancient Constitutional rights to impose the new legislation whereas the Crown Dependencies who are not affected by this decision have unsurprisingly provided a more measured response. This is reflected by Deputy Gavin St Pier in statements very similar to those issued by Politicians in Jersey stating that ‘Guernsey will introduce a public register if that becomes the agreed global standard.’
Gavin St Pier’s words have I am sure been chosen carefully since the body that has the necessary authority to end this debate is The Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) that has been the multinational framework within which work in the area of transparency and exchange of information has been carried out by both OECD and non-OECD economies since 2000. The Global Forum is the only international body endorsed by the G20 on issues of transparency and Exchange of Information for tax purposes.
So what does the Global Forum have to say on this issue. Well, paragraph 14 of the report of the Plenary Meeting of the Global Forum held in Cameroon in November 2017 states ‘The second round of peer reviews launched in 2016 reflects the latest developments in international tax transparency, including the requirement to have beneficial ownership information which strengthens the fight against anonymous shell companies and the use of legal arrangements to conceal ownership of identity.’ So reasonably one might expect, this issue should already have been dealt with. Unfortunately not it seems. The information sharing framework created by the Global Forum is designed as an exchange of information programme between Governments. Information exchanged is not available to the Public. So therein lies the problem. Public disclosure of beneficial ownership, despite what paragraph 14 might say, does not appear to have been clarified by the Global Forum, leaving it to Governments, pressure groups and other Organisations around the World to set the Public Agenda on this thorny subject.
Hopefully at this years Plenary Meeting of the Global Forum guidance will be provided on this issue that will feed through into legislation in all Countries that have adopted CRS. In the Plenary Meeting in Cameroon it was noted that ‘Some Members expressed concern that the ongoing EU listing process (referring to a proposed blacklisting of certain jurisdictions by the EU) is occurring outside the framework of the Global Forum… Statements like this would not I imagine encourage the Crown Dependencies to make further comment on this issue or to take any specific action as the Global Forum is clearly through these remarks reinforcing it’s mandate granted to it by the G20. The direction of travel, if one considers EU anti-money laundering Directives and bodies such as the EITI of which the UK is an important Member, would appear to favour a new regime creating a framework for Public Disclosure but when and in what form all stakeholders in this process will just have to wait and see what develops and whether the Global Forum will opine and then issue model legislation on this important issue.
To read more on this subject please visit: expertsinwealth.com/globalregisters
How Do Public Pension Funds Invest?
This article is sponsored by State Street.
Public Pension Funds (PPFs) are highly idiosyncratic and distinct from other types of institutional investors. The universe of investors that fall within our definition of a PPF is numerous and varied. We count 115 institutions in 70 jurisdictions, diverse in geography and economic development. For the purposes of our study, we examined the top 16 funds whose assets constitute just over two-thirds of the total universe. Despite all the idiosyncrasies of PPFs, we have found some shared characteristics in the evolution of their asset allocation over the past decade.
According to our definition, PPFs held around $5.9 trillion in total assets of 2016 and over 4% of all publicly traded assets, making them a significant global investor group. In particular, given their preferences for specific asset classes, their share is disproportionate in some segments. For example, we estimate that by year-end 2016, PPFs owned over 7% of global tradeable fixed income assets (including 8% government bonds and over 13% of inflation-linked bonds) and over 3% of listed public equities.
Similar to other asset owners, PPFs have undertaken a major reallocation of assets over the past decade. However, the motivating driver has not only been the low yield environment, but also changing regulatory and macro policy settings, which either permitted or encouraged greater diversification along asset classes and geographical exposure.
In detail, the most dominant trend has been the move away from holding domestic (local currency) bonds; in their place, PPFs have redeployed assets towards equities and alternatives, with a small share also diverted into foreign bonds. These allocation trends have been almost universal despite a huge diversity of geography and economic development.
It is important to acknowledge how much this investor group has changed over the past decade, with the asset pool growing by over 40% in dollar terms, and even more if measured in local currencies. While some funds are still predominantly captive buyers of government debt, the bulk of PPFs have been transforming into financial institutions with independent firepower and income-generating capacity. The long-term trend towards more diversified fixed income portfolios is likely to continue, as is the shift towards taking on more risk via equity allocations, subject as ever to changes in market cycles. In this context, we expect most PPFs to not only continue taking on more risk overall, but to further internationalise their portfolios.
Finally, one consideration is that maturing funds catering for aging populations will have to make further adjustments to their asset allocations to account for changing cash flow directions and seek greater contributions and investment returns to bridge any funding gaps.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.
Tracking Code: 2172159.1.1.GBL.RTL
By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.
Elliot Hentov, Ph.D. Head of Policy and Research, Official Institutions Group Elliot_Hentov@ssga.com
Alexander Petrov Policy and Research, Official Institutions Group Alexander_Petrov@ssga.com
Sejal Odedra Business Analyst, Client Strategy, Official Institutions Group Sejal_Odedra@ssga.com
The Slings and Arrows of Passive Fortune
This article is sponsored by S&P DJI.
If a tale were to be written regaling us with the popular exploits of the modern day active manager in his quest for alpha across the many peaks and valleys of the financial world, passive investment would likely feature prominently in the telling. Passively managed assets have grown tremendously since their introduction in the 1970s to command some 20% of the U.S. stock’s market total-float adjusted capitalization, drawing a deluge of criticism in recent years from proponents of a more traditional, active approach who charge indexers with all manner of supposed ills – from encouraging collusive behavior and exacerbating pricing inefficiencies, to indifference on matters of corporate governance.
But are passive assets and their purveyors really the threat to markets that active management makes them out to be? Or are the problems attributed to their rise merely a reflection of the market forces all participants must face? These are the questions posed by Anu Ganti and Craig Lazzara at S&P Dow Jones Indices (S&P DJI) in their new paper, titled “The Slings and Arrows of Passive Fortune,” which seeks to unravel some of the most pervasive myths surrounding the growing role of index funds, highlight the immense value they bring to asset owners, and posits a future of asymmetric equilibrium between the old and the new that puts each in their proper place based on relative – rather than absolute – performance.
Nobody – including the paper’s authors – denies that index-based investment has made life more challenging for active managers, who count alpha as their very lifeblood; but so too would it be foolish to argue its advancement as one of the most important developments in modern financial history is without merit, or somehow Thucydidean in nature. If anything, active management can and should expect its portion of the pie (which, it must be pointed out, constitutes the majority of assets by a wide margin) to remain subject to nibbles from their passive counterparts – nibbles that may, with time, diminish. The market always has room for more players at the table, after all, and we all play by its rules.
As Director and Managing Director of index investment strategy team at S&P DJI, Ganti and Lazzara provide research and commentary on the firm’s entire product set – covering U.S. and global equities, commodities, fixed income, and economic indices. Both are chartered financial analysts and regular contributors to Indexology, S&P DJI’s appropriately named blog covering developments in the world of indexing.
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