Focus, Banking & Finance, and Real Estate

Excess capital supply, rising interest rates are top trends

West Michigan viewed as a viable secondary market for real estate investment.

July 31, 2015
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While a recent report highlights key issues impacting the national and international real estate market, several trends hit home for West Michigan.

The Counselors of Real Estate, an international group of professionals headquartered in Chicago, recently released its third annual compilation of key trends impacting real estate on a national and international level, highlighting excess capital supply, rising interest rates and urbanization among the top 10 issues.

The CRE 2015-16 Top Ten Issues Affecting Real Estate list was announced during the keynote address at the National Association of Real Estate Editors conference in Miami earlier this summer by Noah D. Shlaes, 2015 chair of CRE and senior managing director of global corporate services for Newmark Grubb Knight Frank.

Shlaes said the CRE 2015-16 report is the third time the professional organization has issued the top 10 list and is produced by an external affairs committee and then reviewed, voted and ranked by the broader CRE membership.

“We try to find issues that are national and international in scope, and so they are not, of course, uniformly applicable everywhere,” said Shlaes. “There has always been an overlap between the issues. We are trying to identify everything that is going on in terms of the underlying drivers, and underlying drivers move together.”

The top 10 issues identified and ranked in order of impact include:

  • Demographic shifts
  • Excess capital supply
  • Rising interest rates
  • Global instability and currency devaluation
  • Urbanization
  • Energy
  • The gap between rich and poor
  • Infrastructure
  • Real estate technology and crowdfunding
  • The changing retail model

Although the strong correlation and interrelationships among trends is not unusual, Shlaes said it was the issues in combination that were surprising, such as the combination of international currency fluctuation and excess of capital coming into the United States for real estate investment at the same time members are beginning to worry about rising interest rates.

“Those seem to contradict each other. In some investment cases, there is perhaps the desire to take advantage of a short-lived phenomenon,” said Shlaes. “Availability of excess capital at a low rate can’t last forever, which means some of the changes identified by demographic shifts and by changes in retail models, in particular, call for action now.”

Colliers International Group indicated in its 2015 Q1 U.S. Capital Flows Research and Forecast Report cross-border investors “drove investment gains” with roughly $22.2 billion in properties across all major types, an increase from $10.5 billion the prior year.

The top market destinations included Manhattan, at 27 properties with a total volume of roughly $8.2 billion, and Washington, D.C., with seven properties and a total volume of $1.6 billion, while the top countries of origin were Singapore, 361 properties and a total volume of more than $8.2 billion, and Canada, 134 properties with a total volume of more than $6.6 billion, according to the Colliers U.S. report.

The CRE report indicates the excess capital supply is continuing to flow from outside the U.S. to purchase real estate and “while investment in major cities continues, some non-gateway and edge cities are also experiencing higher levels of investment.”

Colin Kraay, a principal at Colliers International West Michigan specializing in investment real estate, said one of the top issues from the report that is pertinent for West Michigan involves excess capital supply.

“As some of these larger institutions are trying to place money and are not able to find it in major markets, increasingly Grand Rapids is looked at as an attractive secondary market,” said Kraay. “A lot of guys we work with, specifically in investment real estate, are putting their eyes on Grand Rapids because it is perceived as a very viable alternate to those major markets where they are having difficulty finding projects.”

Due to the growth, the strength of the regional economy and the difficulty in finding projects elsewhere, Kraay said there have been a number of new investors interested in West Michigan in recent years.

“The benefit for West Michigan is, once they find themselves here, generally they have a very positive experience: The investment goes well, and they get comfortable with the market, and it makes them want to invest again,” said Kraay. “It kind of perpetuates the growth cycle.”

Tom DeBoer, principal at Colliers International West Michigan with expertise in office brokerage, said there is a lot of excess capital out there and it has to flow somewhere, but rising interest rates have a big short-term effect.

“As interest rates go up, there is no question it affects the return on investment for investors, so they are going to maybe be a little more reluctant to go into some of what we would call the more high-risk markets and look at some of the markets that are more stable,” said DeBoer.

“West Michigan is very diversified — has a lot of different industries, and we’ve maintained a pretty healthy market overall for the last five to six years now. From that standpoint, we’ll see (investment) drop off but probably not near as severe as some of the other markets. We are going to be a safe harbor.”

The CRE 2015-16 Top Ten Issues report indicates the general view is interest rates will remain at near-historic lows for a while longer, but will “devalue future cash flows, thereby devaluing assets” and “rising rates will cause higher mortgage payments, thereby decreasing homebuyers’ choices.”

With a significantly higher interest rate environment, Kraay said West Michigan certainly is just as impacted as any other place, and while it will have a long-term effect, it is also considered a hedge against inflation.

“If you have rising interest rates, you are going to have higher inflation, and real estate should then appreciate further. Your rents will have more momentum to move up to compensate for the higher costs,” said Kraay. “In the short term, whenever there is instability, it definitely has an impact. If all of a sudden interest rates rise … the cost of capital goes up significantly and may be the difference between a development project happening and not happening.”

A number of West Michigan developers have cited the low-interest-rate environment as driving urban downtown housing and urbanization and is definitely a factor in the Grand Rapids area, according to Kraay.

“It has been widely reported, seen and demonstrated that downtown or near downtown housing continues to be on fire. New developments, new projects, redevelopments — that is all kind of that urbanization push,” said Kraay.

“There is no doubt Grand Rapids has seen that, and the demographics shifts have been a part of that too because a big component of the urbanization is that millennial young professional age bracket.”

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