Through Q3 2019, the cap rate-to-corporate bond yield ratio rose to its highest level since 2013, as the relative value of commercial real estate improved as corporate bond yields fell. Elevated deal volume maintained downward pressure on cap rates through Q3 2019, remaining relatively unchanged from one year ago, while BBB corporate bond yields declined by nearly a full percentage point in comparison to 2018. Anticipated interest rate volatility will cause the ratio to fluctuate going forward.
Supported by falling interest rates and healthy property fundamentals, REITs have widely outperformed the broader equity market and private real estate sector, producing close to a 30% total return through October 2019. Year-to-date returns across property sectors, except for regional malls, were buoyant, particularly for industrial, multifamily, and data center REITs. Through the first three quarters of 2019, the return for private real estate was a modest 4.8%, with income returns accounting for a dominant share of this performance.
Following four months of a negative 3-month/10year Treasury spread, the yield “reverted” in October, a trend supported by signs of progress in U.S.-China trade talks, as well as a third cut to the Federal Funds target rate. Quantitative easing and the negative interest rate policy employed by central banks in Europe and Asia have clouded the picture, raising questions concerning the yield curve’s predictive capabilities. Whether or not this recent inversion is a false positive, the curve’s flattened profile reflects the growing investor pessimism and expectations for weaker growth moving forward.
The leading economic index edged upwards through late 2019 but at a significantly slower pace in comparison to earlier in the cycle. The sustained yield curve inversion and weak manufacturing sector growth offset positive signals in other sectors of the economy. Rising by just 0.4% year-over-year, the slowest rate since midyear 2016, the LEI has seemingly plateaued, an indication of more tempered growth ahead.
The unemployment rate maintained its downward trend through the tail-end of 2019. The U.S. economy added jobs at an average of 167,000 jobs per month through October 2019 versus an average of 223,000 jobs per month in 2018. With monthly job creation continuing at a respectable pace, the unemployment rate declined to a cycle-low in September 2019 before rising 10 bps to 3.6% in October 2019.
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.
Copyright © 2019, CBRE Global Investors, LLC. All rights reserved.