What's the Latest with the Commercial Real Estate Market
June 30, 2020
Here's the newest edition of our continuing series on What's the Latest with the Commercial Real Estate Market.
To dive deeper into the state of the commercial real estate market and the economy here and abroad, keep on reading. (We have graphs!)
TL;DR - The health crisis that is the coronavirus will almost certainly lead to an increase in the wealth gap as the rich save their money for future spending.
Part I: Expectations for Future Growth
Earnings per Share (EPS) is a measure of a publicly traded company's profitability. It takes the company's total profits and divides it by the number of shares outstanding. A higher or climbing EPS is a good indicator of a company's potential growth and future profitability.
From the chart above from FactSet, we can see that across all sectors the EPS has gone down since the beginning of the year. However, not all sectors have been effected equally. Utility, technology, and consumer staple companies have only dropped a few percentage points since the beginning of the year. On the flip side, energy and consumer discretionary companies have seen the biggest hit to their EPS. Look to those companies with the least impact to their EPS to make capital improvements in the near future.
Part II: When the Rich Save and the Poor Spend
In times of economic distress, the amount of money people put into savings goes up. The reasons for this are twofold. One: consumers and businesses are concerned for the future and want to keep as much cash on hand as possible. Two, investors know that deals arise at the bottom of the market cycle and so they store their cash now in order to invest later.
From the chart above from the New York Times, we can see that those in the bottom 25% of reported income levels have nearly returned to their same spending amounts as before the coronavirus. However, those in the top 25% of report income levels are only spending at a rate of about 80% of their prior amount. The poor don't have excess funds to pay on discretionary spending or investing, but they still need to pay for basics like food and shelter. Meanwhile, the wealthiest Americans are still spending on the basics but using their excess to put into savings now in order to deploy at a future date.
Part III: Difference in Price Expectations for Buyers and Sellers
If you were to look at most headlines from the previous few weeks and months, you wouldn't be blamed for thinking that the sky is falling. However, those expectations have not yet fully played out in terms of pricing of commercial real estate assets.
From the chart above from Real Capital Analytics, we can see that across several sectors in the commercial real estate market that buyers and sellers do not yet agree on where commercial real estate prices should be. Buyers believe that prices, on average, should be about 10% less than they currently are listed. Compare that to the beginning of 2020 when most buyers believed that prices, on average, were about 5% above listed prices. The only question now remains whether or not buyers will increase their price expectations or will sellers decrease their price expectations in the near future.
Here's to the Fundamentals.