Although cap rates are near record-lows, real estate remains attractively priced relative to fixed income alternatives, as the cap rate-to-corporate bond yield ratio trended upwards in response to declining corporate bond yields through 2019. Fueled by healthy property market fundamentals, as well as declining debt costs, transaction volumes remained buoyant, with total individual-asset sales in 4Q19 reaching its highest quarterly total on record, according to Real Capital Analytics.
Strong property fundamentals and an accommodative capital markets environment fueled healthy listed and private real estate returns. In 2019, REIT total returns fell just short of returns for the S&P 500 index, at 28.7% and 32.0%, respectively. The REIT sector’s strong performance was fueled by the strength of the industrial sector, which overshadowed the retail sector’s lackluster showing. Driven largely by steady income returns, private, unlevered total returns slowed modestly in comparison to last year, easing to 6.4%.
The Coronavirus has raised fears among investors, leading many to flee to the safety of U.S. Treasuries, placing downward pressure on long-term yields through early 2020 and prompting yet another yield curve inversion. The influence of global markets on long-term treasury yields, the distortion caused by quantitative easing, and the lack of inflationary pressure have raised concerns regarding the yield curve’s predictive power. Nonetheless, the inverted yield curve reflects growing concerns regarding the health of the global economy and may contribute to further slowing as lending is disincentivized.
Although still positive, growth in the Leading Economic Index (LEI) continued to decelerate through the final months of 2019, rising by just 0.1% y-o-y% in December 2019. Recent weakness was fueled by a rise in unemployment claims and a decline in housing permits. With the index at a plateau, this deceleration should be monitored, as an annual decline in the index preceded each of the previous six recessions.
The U.S. economy grew by more than 2 million jobs in 2019 – an eighth consecutive year of job creation exceeding 2 million jobs. With the U.S. economy maintaining an above average growth rate through 2019, the unemployment rate continued to edge downward through the final months of the year, falling to 3.5% to close out 2019 and remaining at multi-generational lows.
Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.
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