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Category: san francisco commercial real estate (137)

Mar

National CRE News: Building Owners Enjoyed 2015 Property NOI Growth

Highest Growth Levels since 2007

Source: CoStar
By: Mark Heschmeyer
Date Posted: March 23, 2016

For commercial property owners, 2015 was a very good year. According to early analysis of securitized loan results through February of 2016, the commercial properties backing the loans posted strong net operating income (NOI) growth, increasing 3.8% on average in 2015.

Average NOI for commercial property backing CMBS loans showed a big jump in 2015, compared with 2.66% in 2014 and 2.64% in 2013, according to analysis by Wells Fargo Securities.

The Wells Fargo analysis is based on NOIs reported for more than 6,000 loans in conduit CMBS transactions.

While Wells Fargo cautioned the results are preliminary, if the growth rate stays near the current level, it would mark the highest change since the financial crisis, surpassing the 3.4% annual NOI average increase in 2012.

Hotel, self-storage and multifamily properties backing CMBS loans were the lead profit-centers, driving average NOI increases of 8.6%, 8.5% and 7%, respectively.

Link to article: NOI Growth

Mar

San Francisco CRE News: Is the Bay Area slated for an office market slowdown?

Source: The Registry
By: Michael Hopek
Date Posted: March 21, 2016

Cushman & Wakefield regional director Robert Sammons forecast mixed housing and office markets for the next five years during a recent industry meeting of Bay Area real estate developers, investors, builders and lawers, expressing his concern that changes are needed if San Francisco is to continue growing.

The meeting of the San Francisco Real Estate Roundtable was presented by law firm Hanson Bridgett and dealt with the question of how long San Francisco’s real estate market boom could last. Sammons started the meeting by asking “How is everyone feeling about the economy right now?” The majority of audience members was undecided on the question, with a few skeptical about a positive economic future.

Sammons pointed out that the Bay Area is in its seventh year of expansion. “It’s about time for a downturn of some sort, whether that’s a correction or recession, that remains to be seen,” he said. San Francisco is in the top 10 cities for job growth, while San Jose is number one according to Cushman & Wakefield’s research.

The massive job growth due to the expansion of the technology industry has caused an influx of labor on a grand scale, he explained. From 2012 to 2015 the Bay Area population increased by almost 400,000 largely because of new technology-related labor growth. In the same time period the Bay Area added about 30,000 multifamily units, one for about every 13.5 people, meaning the region is dramatically lacking in housing growth.

Sammons stressed that this deficit is the real problem for residential housing in the city. “We are a mile behind in trying to build housing in this market,” he said. There are currently 21,000 units under construction and about another 53,000 proposed according to his company’s research.

The influx of jobs has impacted the office market, as well. That, Sammons said, makes it difficult for businesses to find affordable office space. Last year the city added 21,600 new office space positions at a growth rate of 5.6 percent. About 60 percent of the tenants in the office market are technology firms.

Of those technology businesses that lay off people because of poor company performance, some wind up putting space on the market to save money. Sammons said there is 1.9 million square feet of space available in the San Francisco market for sublease. There is currently 7.1 million square feet under construction or entitled in the city.

Sammons noted the impact of Proposition M, the1986 law that limits San Francisco’s office space development to roughly 875,000 square feet a year. Over time the city has built up a reserve of 1.8 million square feet in the city’s allocation fund, but that reserve is nearly gone. “We are going to be out of allocation this year, plain and simple,” he said.

Cushman & Wakefield forecasts that city office vacancy rates will continue to increase every year through 2021. Sammons suggested that the 9.9 percent office vacancy rate forecast is “not that bad.” The firm also predicts job growth to slow due to the high cost of living and renting office space, and the city’s inability to keep up with tenant housing demand.

Sammons concluded the presentation by stating that companies might start looking elsewhere for rental space in cities like Austin, Salt Lake City or eastern coastal cities. “It’s just too expensive to live here. So unless something changes, unless we are able to build more housing and pull back on price points, this is the pretty standard forecast,” he said.

Link to article: SF Office Slowdown

Mar

Tech CRE News: Google subleases 407,000 square feet in South San Francisco–expands outside Googleplex

Google’s Medical Technology Division, Verily, Subleases Large Office Campus in South San Francisco

Source: CoStar
By: Steve Wells
Date Posted: March 9, 2016

Verily, formerly called Google Life Sciences, has subleased 407,000 square feet from Amgen to establish a separate headquarters in South San Francisco for the new Google division, which is gearing up to provide pioneering technology for medical research and devices.

Verily will occupy the former Onyx Pharmaceuticals office campus consisting of three Class A office buildings located at 249, 259, and 269 E. Grand Ave.

The planned move 30 miles north from Google’s Mountain View, CA, headquarters, will place the new firm within a global hub for the biotech industry. It also takes a big chunk of the nearly 700,000 square feet of excess space Amgen Inc. (NASDAQ: AMGN) is seeking to sublet in the area. Amgen closed its Onyx Pharmaceuticals subsidiary last year after acquiring the cancer drug developer in 2013 for $9.7 billion.

Alexandria Real Estate Equities, Inc., (NYSE: ARE), a real estate investment trust that focuses on science and technology campuses in urban locations, owns the three buildings. The recently developed campus also has two land parcels representing nearly 400,000 square feet of potential expansion space.

An initial 400 Verily employees are expected to relocate to the new campus by the end of this year with the expectation that the total number at the location could grow to as many as 1,000 through future expansions.

“We are honored that Verily has chosen to expand into one of Alexandria’s world-class collaborative science and technology campuses,” said Stephen A. Richardson, chief operating officer and San Francisco regional market director of Alexandria. “Through our long-term relationship with Google, which dates back to 1998, we have been able to provide Verily with highly curated, innovative and integrated campus solution, which will help support its mission to use technology to better understand health, as well as prevent, detect and manage disease.”

Google Office Campus Sublease in SSF

Mar

National CRE News: Bank Lending Soared in 4th Quarter

Economic, Regulatory Headwinds May Slow Lending Pace in 2016

Source: CoStar
By: Mark Heschmeyer
Date Posted: March 2, 2016

The total amount of commercial real estate loans held by U.S. banks and savings and loans saw a noticeable jump in the fourth quarter of 2015 over the previous quarter. The total amount of CRE loans outstanding held by FDIC-insured institutions increased 3.1% to $1.85 trillion at year-end from three months earlier. That followed an increase of 2.7% from mid-year to third quarter, according to the FDIC.

The $1.85 trillion year-end 2015 total CRE loans outstanding compares to $1.63 trillion at the last peak of the CRE markets at the end of June 2007.

Multifamily loans continued to increase at the fastest pace quarter to quarter, going up 4.6% to $15 billion from third quarter 2015 to the year-end total of $344 billion.

Non-residential commercial real estate lending totals jumped by $25 billion (3.6%) to $733 billion during the same timeframe.

Construction and development loan totals jumped by $8.88 billion (3.3%) to $275 billion.

The asset quality of CRE loans on bank books also continued to improve. Delinquent CRE loan balances declined for a 22nd consecutive quarter. At year-end, total delinquent CRE loans on the nation’s banks’ books equaled $19.8 billion, down 5.5% from the third quarter of 2015.

At the last peak of the CRE markets, delinquent CRE loans totaled $27.6 billion.

The total dollar volume of foreclosed upon CRE properties on banks’ books equaled $8.3 billion at year-end, down 12.2% from the previous quarter. However, in June 2007, the CRE foreclosed total stood at just $2.5 billion.

Banks appear to be benefitting from the strong market for real estate in selling any repossessed properties. For all of 2015, banks posted gains of $215.7 million on the sale of foreclosed properties. That came despite posting a loss on sales in the third quarter of 2015.

The nation’s largest CRE lender, Wells Fargo Bank, which holds about $134 billion in CRE loans, posted a gain of $245 million last year on the sale of foreclosed properties.

FDIC-insured institutions reported aggregate net income of $40.4 billion in the third quarter down from $43 billion in the second quarter of 2015.

Of the 6,270 insured institutions reporting third quarter financial results, more than half (58.9%) reported year-over-year growth in quarterly earnings. That also is down slightly from the previous quarter.

Is a Bank Lending Slowdown on the Horizon?

Total loans and leases at banks increased by $199 billion during the fourth quarter of 2015, approximately 2.3%. That is about double the pace of loan growth in the third quarter and the highest total increase in bank lending in eight years.

The brisk pace of bank lending may cool this year after bank regulators issued an announcement during the fourth quarter that they planned to pay close attention to real estate lending activity among banks.

The FDIC warned in late December directing banks and savings and loans to “reinforce prudent risk-management practices” for their commercial real estate lending.

The FDIC regulators added that they would be paying close attention to bank CRE lending practices in their 2016 bank reviews. The last time the FDIC sent such a memo regarding real estate lending was in 2005.

Asked in Federal Reserve Bank January 2016 survey about their lending practices, senior loan officers reported tightening standards for multifamily loans, a moderate number reported tightening standards for construction and land development loans (CLD loans), and a small number reported tightening standards for loans secured by nonfarm nonresidential properties.

“The operating environment for banks remains challenging. Interest rates have been exceptionally low for an extended period, and we are seeing signs of growing interest rate risk and credit risk,” said FDIC Chairman Martin J. Gruenberg. “Recently, domestic and international market developments have led to heightened concerns about the U.S. economic outlook and prospects for the banking industry. Thus far, the performance of banks has not been impacted materially. However, the full effect of lower energy and other commodity prices remains to be seen. Banks must remain vigilant as they manage interest rate risk, credit risk, and evolving market conditions. These challenges will continue to be a focus of ongoing supervisory attention,” Gruenberg said.

Link to Article: CRE Lending

Mar

SF Tech Real Estate News: 95,000 SF Leased at former Twitter HQ

Source: San Francisco Business Times
By: Roland Li
Date Posted: March 3, 2016

Quantcast, a website analytics company, has leased three floors totaling about 95,000 square feet at 795 Folsom St., the former Twitter Inc. headquarters in South of Market, said two sources familiar with the property.

San Francisco-based Quantcast is replacing AT&T Inc. (NYSE: T), which vacated the space at the end of January, said a source. The swiftness of the deal is another sign that large chunks of office space are still being filled rapidly throughout the city, despite recent job cutbacks at prominent startups such as Zenefits and Surveymonkey. The asking rent in the building was in the mid-$70s, according to marketing materials.

Quantcast, founded in 2006, is also more established than many of the venture capital-fueled tech tenants that are growing rapidly. Quantcast was the 33rd-largest tech employer in the city with 385 employees as of January, up slightly from its 368 local employees in January 2015, according to Business Times research.

A Quantcast spokeswoman confirmed the lease and said the company will be relocating from its current headquarters about three blocks away at 201 Third St.

Steve Anderson and Bryan Ivie of JLL represented landlord ASB Real Estate Investments and asset manager Union Property Capital in the lease. JLL also represented the tenant. JLL declined to comment.

The six-story, 187,000-square-foot building at 795 Folsom St. is close to Yuerba Buena and Moscone Center. It was built in 1976 and renovated in 1999.

Twitter (NYSE: TWTR) moved into 795 Folsom St. in 2009, and then relocated to its current headquarters at 1355 Market St. in 2012. Current tenants at 795 Folsom St. include the real estate space provider Regus (LON: RGU) and gaming company Kabam Inc.

ASB bought 795 Folsom St. from Cornerstone Real Estate investors for $110 million in 2013.

Link to article: SF Tech Company Leases Three Floors at former Twitter HQ

Feb

Could Rail Yard Project in SOMA free up 25 acres for possible development?

Plan to Revap S.F. transit, remove stretch of I-280 debuts

Source: San Francisco Business Times
By: Riley McDermid
Date Posted: February 23, 2016

The first part of a study that looks at razing a 1.2-mile stretch of Interstate 280 in San Francisco in order to revamp infrastructure ahead of the city’s Transbay Transit Center and high-speed Caltrain arrivals will debut Tuesday.

It will be the first look the public will get at the “Rail Yard Alternatives and I-280 Boulevard Feasibility Study” (RAB), which will be unveiled tonight at the Potrero Hill Recreation Center. A multiagency effort, the plan hopes to modify the Fourth and King rail yard and weave SoMa into the Dogpatch, Mission Bay and Potrero Hill, while freeing up 25 acres for possible development.

“The study will review construction methods and rail alignments, including the possibility of moving the Caltrain station at Fourth and Townsend streets to Third Street, between AT&T Park and the planned Warriors arena,” the San Francisco Chronicle reports.

“It will also look at the potential of creating a loop track at the Transbay Transit Center, rather than a stub, where trains have to end and exit on the same track. A loop track would increase the station’s overall capacity.”

But the plan already has some officials questioning parts of its reach, including how rail travel would be incorporated into the city.

The feasibility of creating a tunnel under 16th Street so that trains could travel on top of 16th Street and Mission Bay Drive is also worrisome to Gillian Gillett, director of transportation policy for the city, who told the paper it might make a dangerous zone for cyclists and pedestrians.

“Those two streets will be depressed at great expense, resulting in an urban form that is invasive and hostile,” Gillett said. “We don’t want our streets to get trenched. We did that to Cesar Chavez Street, and it doesn’t create a good environment.”

Even more worrisome? Where the funding would come from, given the increasing costs of the Transbay Transit Center itself, which has been mired in funding shortages and delays. The project has already has taken on a loan from Goldman Sachs that will cost taxpayers $37 million in charges and fees.

That amount is part of a $171 million “bridge” loan that Goldman Sachs (NYSE: GS) is lending the city so that it can continue building the project without a pause due to financial issues.
In December, the Chronicle reported that the price for the first phase of the Transbay Transit Center may jump another $244 million to almost $2.3 billion, and has now added another $4 billion for a related train track project that will run from the three-block building to Fourth and King streets.

Those sorts of operational challenges are why the city needs to get any overarching plan that includes removing a portion of I-280 right the first time, said officials.

“One of the reasons we are in the soup we are in is that development and transportation improvements have not been happening at the same time,” Gillett told the paper. “If you are going to invest in this big seismic shift from diesel to electric, which we have got to do, you also have to look at all the stations. Are the tracks in the right place? Are the stations in the right place so that we can create real connections to other systems?”

link to article: Transit Revamp

Jan

San Francisco Tech News: Yelp HQ building possible sale for $1000 a foot

Source: San Francisco Business Times
By: Riley McDermid
Date Posted: January 27, 2016

Landmark tech HQ building could fetch as much as $1,000 a foot in sale

The San Francisco landmark PacBell building could fetch as much as $1,000 square feet when it is sold, reports The Registry, a record price that points to how high office rents currently are – and the value they are bringing to commercial real estate sales.

At 286,092 square feet of office space and 9,000 square feet of retail, that could add up to $295 million for the building located at 140 Montgomery, which currently boasts tenants such as Yelp and Lumosity.

The Registry’s report posits those high rents that could drive up the sale price of the building, which Wilson Meany and Stockbridge Capital Group bought from AT&T in 2007.

“One of the reasons for the high sales price is the current condition of the rents in the property. The office building has rents that are closer to current market rents than any other office asset in the city at this time,” The Registry reports. “Should 140 New Montgomery achieve the $1,000 per square foot sale price, it would place the asset very close to replacement cost, which some sources in San Francisco have pegged to be close to $1,000 per square foot.”

“Yelp had signed an eight-year lease in 2011 to occupy nine floors in the building with an annual rental rate that began at $54 a square foot and is planned to increase to $66.41 a foot by the eighth year,” The Registry reports.

“The landlord granted an initial $5.8 million, or $60 a foot, tenant-improvement allowance, according to records filed by Yelp with the U.S. Securities and Exchange Commission. Lumosity signed a lease in 2013 to occupy 36,000 square feet, or three floors, in the building.”

Eastdil Secured, the listing agent for the property, didn’t return a request for comment from the Business Times. Wilson Meany confirmed to The Registry that the building is up for sale.

Link to Business Times Article: Tech HQ Could Fetch $1000 a foot in sale

Link to The Registry Report: 140 Montgomery

Jan

San Francisco CRE News: City Proposal Would Double Affordable Housing Requirements

Source: San Francisco Business Times
By: Roland Li
Date Posted: January 12, 2016

Supervisor Jane Kim will introduce a charter amendment today to more than double San Francisco’s affordable housing requirements for market-rate projects to 25 percent.

The change would require voter approval in the June election. The city currently requires market-rate projects to provide 12 percent of their units below market rate. Alternatively, developers can now build 20 percent of their units off site or pay a fee equal to 20 percent of the value of the units. Kim’s proposal also increases the off-site units and the fee to 33 percent each. The charter amendment would also allow the Board of Supervisors to make additional changes to the inclusionary housing policy without going back to voters by removing the existing policy from the charter.

The proposal is likely to spark a fight. Market-rate developers have argued in the past that increasing affordable housing requirements may result in less — not more — affordable housing since the costs could make some housing projects financially infeasible.

Urban think tank SPUR characterized Kim’s new proposal as “undoing the grand bargain” that established the Affordable Housing Trust Fund in 2012. Following the loss of state redevelopment funds for affordable housing, voters approved using general fund revenue to support affordable housing. In addition, the city lowered the affordable housing requirements to 12 percent for market-rate projects. Gabriel Metcalf, president of urban think tank SPUR, is critical of proposing new requirements without doing a study.

“It’s not a good idea to make up an inclusionary requirement out of thin air,” said Metcalf. “We have no way to judge what the right level would be right now. We should do an objective study to set the levels, not have one side re-set them to its liking whenever the political winds are blowing in its favor. Say what you will about the 2012 measure, but it had the involvement and concurrence of lots of different sides in the housing debate.”

Kim’s legislation broadly aligns with Mayor Ed Lee’s call to increase the affordable housing requirements, but he hasn’t proposed a specific requirement and had sought to work with developers to find a consensus.

But Kim called for immediate action. “With the ridiculously high cost of living in the Bay Area, our middle class residents are also vulnerable to losing their homes due to skyrocketing rents they can’t afford or by being pushed out of rent controlled buildings by the landlord. And most of them won’t be able to afford another place in the City,” Kim said in a statement. “This is an urgent step we can and should take now.”

Newly elected Supervisor Aaron Peskin is co-sponsoring the legislation and cites the 40 percent affordable housing numbers at Forest City’s 5M project and the San Francisco Giants’ Mission Rock as precedents for higher affordability requirements. “With Supervisor Kim’s recent successes negotiating unparalleled affordability requirements at Mission Rock and 5M, we know the market can bear it – and so do our constituents looking for relief,” said Peskin in statement.

However, those two projects aren’t indicative that the broader market can bear a higher affordable housing requirements, according to developers. 5M has 825,600 square feet of office space planned and Mission Rock has 1.3 million square feet of office space, which gives them additional revenue sources. The massive size of each project, with 5M’s 688 residential units and Mission Rock’s 1,500 residential units, also give them big enough scale to fund 40 percent affordable housing requirements. A small multifamily project would not necessarily be able to bear the cost of a quarter of its units, developers said, particularly if land prices didn’t fall in response to new requirements.

High affordability also hasn’t swayed opposition to 5M. Three neighborhood groups are now suing to block the project after it received city approval, alleging that the environmental impact study didn’t adequately measure the effects of the project.

Kim’s measure calls for new market-rate projects to provide 15 percent of units below-market-rate housing for renters making up to 55 percent of the area median income, or $39,250 for a single resident under the 2015 fiscal year definition. Rents would be no more than $981.25, or 30 percent, for such income levels. An additional 10 percent of units would be for those making 100 percent of the area median income, or $71,350 for a single resident, which would have rents up to $1,783.75 per month.

For-sale projects would have higher affordability thresholds, with 15 percent of units reserved to those making 80 percent of the area median income, and 10 percent reserved for those making 120 percent of the middle income.

Funding for affordable housing in the Bay Area has decreased due to the state’s 2012 elimination of Redevelopment Agencies and falling federal support. That lack of funding, in addition to an increase in housing demand and spiking prices, has pushed cities around the Bay Area to seek more concessions from market-rate developers. Oakland, San Jose, Berkeley and Emeryville have all moved to implement new fees or increase existing ones to fund affordable housing.

If the fee level is too low, as Supervisor Kim is arguing, the city is not maximizing its funding for affordable housing. But if fees are too high, there’s risk that market-rate development could slow and overall affordability could decrease as demand rises faster than supply, said Metcalf.

Supporters of the ballot measure include the nonprofit Tenants and Owners Development Corp., a prominent South of Market nonprofit, and the Council of Community Housing Organizations, which represents affordable housing developers and tenant advocates. They argue that the current requirement of 12 percent is outdated and that the city’s surge in market-rate construction can support more affordable housing.

“This is how public policy works. It changes and evolves to the circumstances of the time. The circumstances are totally different than 2011,” said Peter Cohen, co-director of CCHO.
Requiring 10 percent of units for residents making around 100 percent of the area median income would also provide much-needed supply for those who struggle to pay market-rate but make too much to qualify for most below-market-rate units, said Cohen. Kim’s proposal “ensures that market-rate projects will continue to provide a portion for middle-class households,” he said.

Link to article: SF to Double Affordable Housing Requirements?

Jan

Tech CRE News: Airbnb in Talks to Lease Former Dolby Office in SOMA

Source: San Francisco Business Times
By: Roland Li
Date Posted: January 14, 2016

Back in October, the audio giant Dolby Laboratories Inc. completed its move to 1275 Market St., heralding another tech arrival in San Francisco’s changing Mid-Market neighborhood.

With the relocation, Dolby (NYSE:DLB) vacated a 150,000-square-foot office at 999 Brannan St. in South of Market, and the building is close to being filled again. Airbnb Inc. is in talks to lease at least 100,000 square feet at 999 Brannan St., said three sources familiar with the property.

The pending deal is another affirmation that even as companies put up large blocks of sublease space on the market, suggesting a slowdown, other growing businesses are quickly snapping them up. Strong market activity, particularly from tech companies, has propelled San Francisco to become the most expensive office market in the country.

999 Brannan St. appears to be a natural expansion for Airbnb. The property is about a block from Airbnb’s current headquarters at 888 Brannan St., separated by Highway 80. The four-story property has a glass facade that wraps around its curving triangular structure, along with rooftop parking and a penthouse conference room, designed by Leddy Maytum Stacy Architects. The asking rent in the building wasn’t clear, but South of Market’s average office rent has surpassed $70 per square foot.

Dolby bought 999 Brannan St. from Shako Real Estate Management Inc. for $18.2 million in 1998, according to property records, but with renovations and a new tenant, the building would be worth exponentially more.,p>
Airbnb’s current location at 888 Brannan St. is evidence of the sharp jump in building values in the area. Last year, pension fund TIAA-CREF bought 888 Brannan St for $312 million from Beacon Capital Partners, a 69 percent profit on the $185 million that Beacon paid for the building in 2014. Airbnb leases 225,000 square feet, or more than half of the 400,000-square-foot building.

Airbnb, valued at $25.5 billion in its latest fundraising round in November, is the world’s third-most valuable private startup on paper, behind Uber Technologies Inc. and China’s Xiaomi Inc. The short-term rentals company also lobbied aggressively and spent $8.5 million to defeat Prop. F, a San Francisco ballot measure that would have added restrictions to its business. The company had around 500 San Francisco employees last year, according to Business Times research.

Jack Jackson of Tailwind Commercial, the leasing broker for 999 Brannan St., didn’t respond to requests for comment. A spokesman for Airbnb declined to comment.

Link to article: Airbnb Eyes Former Dolby Space

Dec

National CRE News: Fed Raises Rate After 7 Years–How Hikes will Affect Commercial Real Estate

Interest Rate Hikes Reflect Expected Strengthening of Economic, Employment Conditions

Source: CoStar
By: Mark Heschmeyer
Date Posted: December 16, 2015

After seven years of worrying over raising interest rates, discussing the best time to raise interest rates, and debating the impact of raising interest rates, money from the federal government is no longer free.

In a unanimous vote, the board of the Federal Reserve voted to raise interest rates a quarter of a percentage point.

The hike has been anticipated for nearly six months, thanks to a thorough communication strategy from the Fed that all but eliminated the element of surprise for a jittery stock market. The increase became a foregone conclusion following strong employment growth numbers last month.

Additional interest rate hikes are expected going forward, but will come slowly as the Fed continues to take an accommodative stance supporting further improvement in labor market conditions and a return to 2% inflation.

The impact from the decision could also take some time to surface.

“We do not believe today’s move will have any impact on the commercial real estate markets and that the Fed likely has significantly more room to move before we begin to see real pressure on cap rates,” said Spencer Levy, head of research, the Americas for CBRE. “That said, certain markets may be more susceptible than others to interest rate increases.”

The other wild cards Levy said could have a bigger impact than interest rates include the price of oil, an economic crash or ‘hard landing’ in China, which would lead to pull back in Chinese capital flows, or some other “black swan” event which would impair global growth.

Any such event could easily cause the Fed to reverse course, neutralizing any potential capital outflows, Levy said.

“The flow of international funds-combined with domestic pension funds’ large pools of capital allocated to commercial real estate but unspent-will outweigh any potential increase in the cost of capital,” he added.

Hans Nordby, managing director of CoStar Portfolio Strategy in Boston, agreed that today’s Fed rate hike should have little or no impact in the near term for private sector commercial real estate investors.

“First, while nominal cap rates are very low versus history, the spread between going-in cap rates and comparable investment vehicles, including bonds, stocks and treasuries, is very high,” said Nordby. “Therefore, rates can come up a bit before cap rates need to rise.

“Second, the Fed chose to increase rates because the ‘real’ economy, most notably job growth, is strong. Strong economies increase demand for real estate, and therefore rents. So, these increased rates are in tandem with higher incomes for the real estate, all else being equal,” he added.

“Finally, the fed is unlikely to push rates very hard in near future, given that growth outside the U.S. is very low, and the dollar is very high. Pushing up rates would make American exports even less competitive, just as foreign markets’ demand for U.S. goods is declining.”

Jeffrey Rinkov, CEO of Lee & Associates, said he also expects the rate hike will have minimal impact on commercial real estate.

“Based on a strengthening and stabilizing economy, I believe this was a logical move by the Fed,” Rinkov said. “While the Fed is driven by data, I think this signifies its belief that the economy can operate in an environment with a normalizing monitory policy. Relevant to real estate investment, long term interest rates should remain at historical low levels which will continue to incentivize investment.”

Housing Could See a Boost

One area that could see relief from a higher-rate environment is housing.

Steve A. Schwarzman, chairman and CEO of The Blackstone Group, took an informal show of hands survey last week at Goldman Sachs U.S. Financial Services Brokers Conference, asking the audience how many thought rising interest rates would hurt housing prices and then how many thought it would help.

Hardly anybody raised their hands when asked whether housing prices go down. And about a third of the room put up their hands very slowly when asked whether housing prices go up.

“Well,25 over the last 26 times in history when interest rates went up the value of houses went up,” Schwarzman said. “Because when you have inflation or you have people making more money with the economy growing, that tends to push up the value of houses.”

The more interesting question about interest rates, Schwarzman said is how slowly prices go up.

“But if the markets want to be down on real estate values, that’s okay,” Schwarzman said, “because then we’ll just take out some huge companies, put out huge amount of money at very good prices and what happens at the underlying assets are always worth way more than the stock market is willing to value at the stage and a cycle.”

Martha Peyton, managing director of TIAA-CREF Global Real Estate Strategy & Research, acknowledged that there are fears rooted in the perception that rising interest rates will weaken property values and commercial real estate (CRE) investment performance.

“But, historical data show that higher interest rates have not necessarily derailed CRE total returns, Peyton said. “In fact, property performance has often remained resilient in the face of rising rates. Furthermore, there are a number of factors that may provide protection to overall property performance in a rising interest rate environment.”

The most important protective factor, she said is that rate hikes in the current environment reflect expected strengthening of economic and employment conditions.

Link to Article: Fed Raises Interest Rate