Capital market developments: What's next?
U.S. economic trends and U.S. equity stock trends clearly have significant influences on real estate capital markets. Currently, the GDP is the strongest it has been since 1984, with no signs of a recession in the near term. Inflation is low but rising. Interest rates are fluctuating within a wide band. As of mid-January 2000, the Thirty-Year Treasury yield experienced a 52-week range increase of 163 basis points. The Ten-Year Treasury experienced an increase of 200 basis points. From January 19, 2000 to April 6, 2000, the Thirty-Year and Ten-Year Treasury yields decreased 95 basis points to 5.78 percent and 89 basis points to 5.86 percent respectively.
The market value of stock equities is dramatically outpacing the GDP. The norm for the market value, of equities since 1925 is a little over half of GDP. Currently, MVE is approaching 150 percent of the GDP! A further sense of caution is evoked when looking at the composition of the stock market equities' gainers and losers. Growth in the S&P since December of 1998 is largely attributable to only five companies that account for close to 80 percent of that growth. It is also of interest to note that the percentages of stocks in the New York Stock Exchange and S&P 500 indexes reflect that approximately 80 percent of stocks are off their 52 week highs by 10 percent to 30 percent. Having enjoyed five years of unparalleled stock equities growth, markets are now experiencing substantial fluctuations and earnings concerns.
The economy and stock market equities clearly influence cash flows into real estate and overall real estate capital markets. Real estate benefits from investors balancing their portfolios with real estate investments of both debt and equity. When stock equities become less attractive alternative investments, real estate benefits. However, the value of stock equities influences spending in the public and private sectors and impacts corporate expenditures for real estate. Institutional capital invested in real estate increased from 1997 through 1998 approximately 7 percent, but decreased from 1998 through 1999 approximately 30 percent. This trend is largely attributable to stock equity appreciation that often eclipses Real Estate. The REIT market exemplifies this trend. Although many REIT's are yielding double digit returns, the market value of these REIT's is below net asset value.
Investment by property type reflects retail and office properties as remaining the preferred types, but with residential rental gaining appeal with REITS and pension funds. Opportunities can also be found in build-to-suit and repositioning of properties driven by specific users. Exploring current REIT strategy identifies a trend focusing on added value opportunities that provide alternatives to previously available, distressed property opportunities. Selling non-core assets and assets that are more valuable to someone else, other than the current owner, will account for much of the REIT selling in 2000.
While capital from banks continues to flow into real estate, the Fed is reviewing the lending practices of its institutions. Fed concerns over lender exposure and reserve requirements, with specific emphasis on real estate development risk, will help slow the race to over supply.
Aggressive capital continues to emanate from European capital markets as a function of continued lower returns in the European financial markets, compared with the U.S., and is further fueled by foreign investment tax advantages.
While examination of the current status of the capital markets and the factors influencing those markets leads one to the conclusion that the real estate market in the U.S. is at a peak in the cycle, the question is how long can this current peak be sustained. Diligent, continuous tracking of these trends and influencing factors are critical at this point in the cycle.
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|Author:||Clowell, Patrick R.|
|Publication:||Real Estate Weekly|
|Date:||Apr 19, 2000|
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