MARKET INSIGHTS
August 18, 2019

Andy Little

RICHMOND TIMES-DISPATCH

by Andrew Little, Special Correspondent

It’s official.

Like an alternative verse to The Beatles hit song “A Long and Winding Road,” the U.S. last month entered the longest economic recovery in history.

At the end of last month, the Federal Reserve also lowered the Federal Funds target rate by 0.25%. While this change surprised virtually no one, it indicated to the investing public that, yes, there are clouds on the horizon, but more importantly, it showed the Fed wants the expansion to continue.

What are the clouds? Probably the greatest concern is the amped-up trade war with China.

China seems ready to play a long game of poker with the Trump administration, and that has roiled markets and created what is called a “risk off” environment.

When market sentiment changes from “risk on” to “risk off,” there is generally a run to safety and away from risk.

Since the stock market is viewed as risky and U.S. Treasuries are viewed as safe, investors sold off stocks earlier this month and gobbled up U.S. Treasuries.

Bonds sounded the loudest warning bell yet of recession last week when the yield on the 10-year Treasury briefly fell below the two-year yield. When yields get “inverted,” market watchers say a recession may be a year or two away.

With the 10-year Treasury yield down to its lowest level in three years, real estate investors are salivating and rushing to lock in mortgage rates that are generally at or near their all-time lows.

Low leverage 5- and 10-year term commercial real estate loans are now in the 3.00% to 3.25% range, respectively, and fuller leverage conduit pricing for 10-year loans is in the 3.50% to 3.75% range.

Interestingly, real estate as an asset class is holding up well compared to the stock market. Year-to-date returns for the Vanguard Real Estate Index Fund ETF through last Wednesday were 19.8% compared with a 13.4% return for the Vanguard S&P 500 ETF.

This is in stark contrast to each exchange traded fund returns over the past 2- and 5-year time horizons, where the S&P ETF has significantly outperformed the real estate ones.

For most of 2019, market watchers have been expecting rates to fall. That has helped boost REIT shares, but also is generally positive for privately held real estate.

Commercial real estate investment volume in the second quarter reached $121.5 billion, a 3.4% increase from the same quarter in 2018 and the highest level for a second quarter since 2015, according to a recent publication from commercial real estate brokerage CBRE.

For the trailing 12-month period ended June 30, the results show the same trend, with acquisition volume up over 12.4% compared with the trailing 12-month period ended June 30, 2018.

Meanwhile, a study from commercial real estate analytics company CoStar Group Inc. showed that sales volume for industrial properties across the U.S. has grown 6.3% in the past year.

Sales in Richmond hit the top 10 list as one of the areas with the strongest growth during that period, the study showed. Richmond’s industrial property sales volume growth (total sales dollars) was up 68.8%, according to the report, and that was good enough for seventh place.

The same report ranked Norfolk in fourth place with 83.6% growth in industrial property sales volume.

A separate analysis of apartments of more than 50 units sold in the Richmond region shows another high-water mark.

The CoStar data indicate that apartment sales volume in the second quarter was $346.5 million. That is the highest quarterly sales volume in the past 10 years with the next closest registering sales volume of $255.9 million in the fourth quarter of 2017.

A review of historic retail sales data supports the trend with the past four quarters showing the highest sales volume during any trailing four quarters in the last decade, according to CoStar.

Sales of office properties in the Richmond area, however, did not support the overall trend of increasing sales volume.

Real estate sales in the U.S. tend to increase when interest rates are lower, and we are seeing accelerating sales in the Richmond area.

Let’s hope it’s not a signal that the long and winding road of recovery is coming to an end.