M&M: CRE Outperforms as Volatility Grips Stock Market

China’s recent economic troubles pushed the S&P Volatility Index to its highest level since 2011, which could cause more investors to favor commercial real estate, said Marcus & Millichap in a special report.  

“An influx of both corporate bond and commercial mortgage-backed securities issuance over the last couple months stretched investors’ appetite for fixed-income investments, setting the stage for additional caution when equity market volatility erupted,” said William Hughes, senior vice president with Marcus & Millichap Capital Corp.  

Spreads on CMBS offerings widened by 15 to 30 basis points amid rising uncertainty while life companies mitigated risk by establishing rate floors on their lending and by slowing their processes to await a calmer lending environment, Hughes said. “Banks had already started to adjust their lending practices before the wave of volatility hit the market by shortening lending terms, favoring five to seven-year loans over longer options,” he said. “Considering the significant stock market swings, lending proceeded with little interruption and mortgage rates have remained exceptionally low.” 

Marcus & Millichap’s report, Commercial Real Estate Outperforms as Volatility Grips Stock Market, said numerous drivers support commercial real estate investment, including: 

■ The U.S. economy has added nearly 1.5 million jobs this year, maintaining broad demand for commercial real estate. 

■ New construction for most property types remains low given the current stage of the cycle. 

■ Strong corporate performance underpins demand for office space as residual space burns off. 

■ Favorable demographics and pent-up demand will support the housing sector–both apartment and for-sale housing.

■ Rising consumption and emergence of Internet retail lift industrial demand at major hubs and in local markets. 

■ Steady gains in both business and leisure travel generating record-setting hospitality performance. 

■ Competitive commercial real estate yields benefit from the low interest rate environment. 

■ An surge of domestic and international capital seeking security of hard assets boost commercial real estate liquidity and support increased property values. 

The volatility that hit Wall Street in recent weeks also sparked a rapid flight to safety into Treasuries, Hughes said. The yield on the 10-year Treasury dropped from about 2.2 percent to below 2.0 percent in four trading days. Treasury yields since returned to the 2.2 percent range.  

“The whipsaw performance could delay the much-anticipated Federal Reserve rate increase, though a September adjustment is not off the table,” Hughes said. “Broad-based economic momentum continues to support the case for Fed action, but market instability could restrain any movement. Because inflation remains in check, the Federal Reserve still has maneuvering room, and its highly cautious positioning could delay action until December or even into 2016.”