Twitter Chat: Bob Bach on Today’s Outlook for CRE Leasing, Capital Markets

Bob Bach joined CPE for a live Twitter chat about the outlook for leasing and the capital markets. The transcript follows.

Bob Bach, national director of market analytics at Newmark Grubb Knight Frank, joined us on CPE’s Twitter page the other day, and

(in 140 characters or less per tweet) lent his 35 years of real estate market expertise to chat about today’s outlook for the commercial real estate leasing and capital markets. He also offered insightful observations on which property types and metros will outperform in the next few years. Some CPE Twitter followers joined in on the Q&A discussion.

CPE: Bob, is suburban office the new frontier for yield investors – or is it a trap?

Bach:  I would say neither yet. Market conditions are improving, but investors are not warming up to it. Be selective. To add a little color, some markets are doing better than others  energy & tech. Austin is the standout (has both).

Alice Muncaster (CPE Twitter chat follower, with The Counselors of Real Estate):  What factors affect the corp. decision to occupy urban vs. suburban campus locations (HQ or office)?

Bach:  Lately, urban has the upper hand in so-called 24-hour CBDs  transit, educated workforce.

CPE:  Everyone talks about the top industrial markets. But are there less publicized markets with good investment prospects?

Bach:  I’m looking at the 1-year rent change. Double digits in San Antonio & Miami. Miami demand spilling into S. Broward.

CPE: Are apartments headed for trouble?

Bach: Not yet. Overall construction still low compared w/historic data. Watch homeownership rate & housing recovery.

CPE: When would you anticipate there being greater risk?

Bach: Strongest returns may be behind us (REITs). Market construction not in red zone. May level out. Too soon to worry.

CPE: Which markets are likely to outperform?

Bach: Austin issued 11,117 M-F permits last year, 5th highest in U.S.  bears watching. San Diego, which I like, had 3,040. 

Dennis Kaiser (CPE Twitter chat follower): Are lenders really off the sidelines and are companies signing leases?

Bach:  Yes. More funds, institutions issuing debt. Banks, too, but not like pre-crisis. Some say too much capital depressing yields.

Kaiser:   Very good. In So Cal, hearing positive buzz. Was interested in your national perspective. Thanks. 

Bach: Re: leases, companies signing but want to use space efficiently, less sq ft per emp. It’s restraining pace of recovery.

Kaiser: How do you think the crisis will impact the next phase in CRE – i.e. what’s the big takeaway?

Bach: Rising interest rates could push up cap rates/reduce value. But spread of 10-yr. yield vs. cap rate wide so some room for int rates to rise before cap rates. Still, high-leverage deals on non-core assets could feel the pinch.

Kaiser: Dampens landlords & new development. Some interesting flex office concepts now practiced.

CPE:  Retail leasing stats have been terrible, but NCREIF returns have been great. What’s with the discrepancy?

Bach:  NCREIF members (pension funds) buy the best centers, lot of wealth in U.S. But many empty big boxes weigh on overall stats.

CPE:  How would you rank the major property sectors based on expected performance as we look toward the end of the year?

Bach: Always been a fan of industrial. Leasing fundamentals look good in Q1. Retail (best centers) has been outperforming. CBD office still strong & investors moving to secondary mkts for yield. Apts doing well, too. Const. wave ahead of us.

CPE: Generally speaking, how do you see prices changing as the year advances?

Bach:  Upward pressure on prices. Demand for core assets high & moving out risk curve. CRE offers yields in low-yield era.

CPE:  Thank you for your insights, Bob. It’s been very informative.

Bach:  Enjoyed it very much. Thanks for the opportunity.

Kaiser: Great insights, as always.

For the live Twitter Chat, go to #cpechat.