Beyond the Build

Construction Trends

What’s Ahead for Commercial Real Estate From an Investment Veteran

Retirement is a strange word to me, as it seems few people ever really stop working.  Perhaps we just shift our interests a bit.

Last week, I was talking with the recently “retired” Mike Prior, who formerly managed a mortgage loan investment portfolio of $5-6 billion for a major life insurance company. Mike now offices in our quiet wing (the financial/accounting side of the office) as a friend and a good sea anchor for our customers.

Our conversation reminded me of a few things I picked up at the ICSC Open Air Conference, which had an attendee makeup of  mostly“C” suite folks…and me. Here are a few of Mike’s thoughts, which seem in sync with those from the conference:

Printing money. Through QE3, the Fed  is continuing to purchase bonds at a rate of about $85 billion a month. This means more cash is going into the banks, the equivalent of the Fed printing money. Someday, the Fed is going to have to take this manufactured money back out of the system, and we will be left with serious implications in the form of interest rates. The Fed dialog seems to be a move afoot to start to trim back, as soon as this summer.

Available Capital. Right now, there seems to be an unlimited amount of capital available for real estate from banks, insurance companies and the capital markets (conduits) who are seeking more investment yield and more aggressive lending from the commercial banks. This is driving cap rates down, and thus real estate, offering some of the higher risk adjusted returns in the investment markets.

Inflation Ahead. Based on the deficit spending and the Fed’s current activity, there is some fear in the market of the  potential for the early 1980s type of inflation. That was not a fun time. It seems like it is not matter of “if,” but “when.”

Government Deficit. When interest rates ease upward, the real challenge will be a dramatic increase in deficit as higher yields are paid on government debt.

RE Debt. We are living off subsidized rates. This means long term debt on real estate pricing right now is a blessing.

Lenders. Lenders seem to be more insensitive to asset quality these days, which continues to put downward press on cap rates across all sectors. This contrasts with the last robust period for asset trading, where there was a flight to quality.

What trends are you seeing in the real estate market? Are you changing your business accordingly? 

Merrill Stewart Jr.

Merrill Stewart is Founder and CEO of The Stewart/Perry Company, a commercial building contractor based in Birmingham.