On November 18th, the Graaskamp Center was pleased to welcome Jim Costello, SVP of Real Capital Analytics, as the keynote speaker for our third installment of the Virtual Leadership Series. Costello was introduced by Irgens Executive Director Michael Brennan, who briefly touted the Wisconsin Real Estate Program’s accomplishments over the past year: the #1 ranked US News and World Report public real estate program in the nation, the formation of the new private equity track, and garnering arecord 537 undergraduate and 30 master’s students for the 2020-21 school year.
After Brennan’s introduction, Costello dove into his presentation, titled, “CRE Investment to the year-end…. Bring on 2021.” His presentation began with analyzing global commercial real estate deal volumes, and specifically, how different regions of the world have been affected by the Covid-19 pandemic. The Asia-Pacific region, due to the early emergence of the virus at the onset of 2020, has been below 2019 deal volume levels for the entire year. In the Americas, on the other hand, deal volumes were healthy through the first few months of 2020 before the virus reached our shores, however, the region then saw a much steeper decline than other regions, albeit later in the year. Europe showed early resilience, but has begun to tail off as we get into Q3.
Costello then shared data on domestic acquisition volumes, which, unsurprisingly, saw a precipitous drop in Q2. However, acquisition volumes improved much more than expected in Q3 as “we worked through the mechanical issues,” such as courts reopening, site visits permitted, and other operational hurdles that obstructed deal flows in Q2. The backlog in deal volume helped propel the quarter and gave momentum to the acquisition environment.
In terms of the pandemic’s effect on the different property sectors, Costello notes that no sector has been spared, however, there has been a large bifurcation for commercial property prices. As he mentions, properties sectors have thus far witnessed a “k-shaped” trend, with industrial and multi-family above December 2019 levels, and retail, office, and hotel below the same indexed time frame.
Costello then shifted into an update on commercial real estate financing and the abrupt changes in financing sources that has occurred in 2020. As he noted, “one leg of the financing stool is gone”: CMBS financing evaporated to a near-zero percent of financing for new deals in Q2. However, this is not reminiscent of the GFC, as this time around, banks and government agencies were able to fill the gaps left by CMBS’s decline. As noted in his presentation, “only one leg is gone, not a sign of doom and gloom.”
Interestingly, despite the vast upheaval in commercial real estate caused by the pandemic and the subsequent sharp increase in distressed assets, there has not been much movement in distressed sales. But, Costello reiterates that this could change in 2021 if conditions do not improve. Similarly, cap rates have not moved much during the crisis, partly due to the low interest rate environment.
Costello then ended his data-driven presentation with a Q&A session, where he touched on the political climate in the US and how that has effected foreign capital inflows, the global interest rate environment, and his predictions for 2021 deal volumes.
We thank Jim Costello for his incredibly well-researched insights and sharing them with the Graaskamp community. We hope you join us for the next Virtual Leadership Series featuring the 2021 Real Estate Outlook by our own Mark Eppli, Graaskamp Center Director. To be placed on our mailing list for the event, email firstname.lastname@example.org.