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  • The brief period following the Presidential election has been the best of times for equities and the worst of times for fixed income.


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  • With the Chicago Cubs winning the World Series for the first time since 1908, the city of Clevelandwinning its first professional sports championshipsince 1964, England voting to leave the EuropeanUnion, and Donald Trump winning the U.S.Presidential election, it seems anything is possible– even government policy returning to economic relevance.

     



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  • Economic growth continues to be driven by the consumer.  Personal consumption expenditures, a positive contributor to GDP growth since the first quarter of 2010, added 290 basis point to second quarter GDP.

     

     


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  • Much to the surprise of financial markets, the U.K. voted to leave the European Union. In addition to the near-term financial market implications, there are very real economic ramifications not only for the U.K. and the Eurozone, but for the global economy as well.

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  • Core, value-add, and opportunistic have become well-established classifications for real estate strategies. But just as Capital One’s credit card commercials ask credit card holders “What’s in your wallet?,” real estate investors would similarly benefit from asking themselves “What’s in my real estate fund?”

     

     


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  • Up to this year, the global economic story has been one of the U.S. and then the rest. The U.S. continues to lead the economic pack, while the E.U. and Japan are stuck in tepid growth, fending off recession.

     


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  • Recently there has been a flurry of news reports touting the droves of Millennials moving to the suburbs. Although this may make for a great headline, the message is not representative of what is actually occurring in the housing market.

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  • While 2015 was not as advertised, it was largely as we expected. As late as December 2014, a Wall Street Journal survey of economists projected the 10 year Treasury rate to end the year at 3.2%, 100 basis points above the actual year-end rate.

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  • Now that the Fed has initiated the first rate increase, we can finally move to what actually matters: the path of Fed policy.

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  • An early fall chill came over the employment market in August and September, with employment numbers at a disappointing 136,000 and 142,000 jobs added, respectively.


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  • As we make our way toward a tightening of U.S. monetary policy, discussions surrounding rising interest rates and their impact on cap rates are increasing at a pace far greater than the interest rate increase itself.

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  • Prevailing investor sentiment seems to be that, because commercial real estate values have returned to previous peak levels, they will automatically decline. This is far too simplistic.

     


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  • Is Now The Time To Pursue Outsized Gains or Minimize Risk? In order to get the right answer, you first have to ask the correct question. Today, investors are asking whether the commercial real estate market is at peak asset pricing, or more directly, whether asset prices can only go down from here.


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  • China’s surprise currency devaluation this week could be a net positive for U.S. commercial real estate capital flows and cap rates, but a mixed bag for the U.S. economy. When the world’s second largest economy and largest exporter surprises investors with an overnight currency devaluation, investors are likely to increasingly seek out safe-haven assets including U.S. real estate.


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  • As we anticipated, the economy awoke from its first quarter slumber amid increasing market volatility. Second quarter job growth averaged a healthy 221,000 new jobs while the rolling twelve month total for the period surpassed 2.9 million, the highest for a July to June period since 2000.


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  • The volatility on the international scene, much like the recent sudden decline in oil prices, is a stark reminder of the risks present in an environment where asset values are unusually dependent on monetary policy. Prolonged easy credit, such as investors have experienced during the recovery, has increased the vulnerability of markets to financial instability events as even small shifts in investor sentiment and the accumulation of aggressive loans can greatly magnify moves in global markets as well as cause them.


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  • New car sales have been on a roll. After fewer than 5.5 million units were sold in 2009, new car sales increased to nearly 7.7 million units in 2014. This represents 99% of the most recent peak set in 2006.


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  • Millennials are on every real estate investor’s wish list, especially apartment investors, and for good reason. They are today’s largest demographic cohort, at 87 million compared to the 76 million Baby Boomers.


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  • Spring Transition Brings Stormy Weather: The Transition from Winter to Spring Will Bring Instability to More than Just the Weather. Green shoots of spring are finally appearing as warm weather fronts begin to make a welcome return to the U.S.


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  • Recent volatility in oil prices is an abrupt reminder to real estate investors of how quickly markets outside of commercial real estate can change. It is clear there are risks from being complacent, even in an asset class with longerterm return characteristics, when conditions can change quickly.


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  • Plan sponsors are faced once again with the familiar but unwelcome dilemma of choosing between two roads: short-term yield gains or superior long-term income growth. In today’s low interest rate environment, the temptation to chase higher near-term yields is enticing now that memories of the 2008 financial downturn are fading.


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  • Inflation, deflation, new normal, secular stagnation, escape velocity – the investing environment is everchanging and awash in a dizzying array of daily catchphrases. As recently as April, the pundits were largely focused on deflation while just two months later Federal Reserve inflation hawks were emboldened by stronger than expected employment growth and an uptick in inflation.


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  • A flight to quality in commercial real estate by investors has been evident in the current cycle; pricing gains began earlier in the top end of the market and have been consistently stronger throughout much of the recovery. This stronger growth also mirrors the trend in the recovery of market fundamentals for commercial property, where demand for Class A office buildings, modern big-box warehouses, infill retail, and luxury apartments has outpaced the broader market.


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  • Headed into 2014, the prospects for improving U.S. economic growth were as bright as they had been since the Great Recession. Apart from Federal government cutbacks, every other sector was expanding and, for the most part, accelerating.

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  • The U.S. economy is growing at a frustratingly slow pace. Consumption has not fully recovered from the huge dip in 2009. Yet tenant demand for industrial space has boomed over the past year. Why? Our view is that in the industrial market, the composition of economic growth matters more than the rate of growth.


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  • A year ago, American Realty Advisors argued that a third round of quantitative easing (QE) would result in increased capital inflows into commercial real estate. Even with an economy that has performed only so-so despite the stimulus provided by QE3, that is exactly what has happened.


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  • Just when it seemed like the yield on 10- year Treasuries might stay below 2% for the foreseeable future, the interest rate spike in May and June reminded us that volatility is here to stay. This volatility provides all kinds of conflicting indications about the direction of the U.S. economy and real estate markets, but one thing is for sure: it will generate a lot more noise than signal.


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  • Two or three years ago, the most common questions we were asked were, “Will the U.S. slide into a double-dip recession? And is now a good time to invest in real estate?” The respective answers turned out to be no, and an emphatic yes. A year ago, they were, “Will Europe’s crises take the U.S. down, too? And is now a good time to invest in real estate?” Again, no (or at a minimum not yet), and yes.


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  • Even after three years of impressive returns, the entry point to commercial real estate as of early 2013 looks favorable—it is still an early-cycle recovery in terms of rents and occupancies, cap rates are above fixed income alternatives, and there is generally little construction on the near-term horizon. For apartments, however, the risk-return analysis requires a little more math.


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  • It is tempting today to look forward and conclude that, as compared with a year ago, the outlook for U.S. commercial real estate is less uncertain. After all, many of the risks that characterized the intervening period are fading in importance. The problem with this “certainty,” though, is that the same might have been said a year ago . . . and the year before that . . . and possibly even the year before that. Every year since the Great Recession has brought a host of new surprises – each generally more negative than positive.


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