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The impact of Brexit will be long and protracted, which will likely result in increased volatility in the capital markets.

Foreign capital has been pouring into stocks and bonds and also is expected to seek refuge in hard assets like commercial real estate.

Commercial real estate has enjoyed ample liquidity on the equity side, while the debt side saw some contraction in 1H16.

The Dodd Frank risk retention rules that take effect in December are casting further doubt about the capital requirement and structure of CMBS.

    You can also download a PDF file of this edition of the BRIEFING
ECONOMIC SNAPSHOT

The impact of Brexit will be long and protracted, which will likely result in increased volatility in the capital markets. But in the short term, the impact has been generally positive for the U.S. with the flight to safety driving down 10-year treasury notes to a new historic low of 1.39%. Expect low rates to continue for the foreseeable future, since the Fed is apt to postpone further increases until political and financial market uncertainty subsides. In the meantime, foreign capital has been pouring into stocks and bonds and also is expected to seek refuge in hard assets like commercial real estate. The underlying investment narrative — that Central Banks have the power to keep the party going — is being questioned, as monetary policymakers run out of options in Japan, the EU and even China.

Despite a few conflicting indicators, the U.S. economy appears to be losing some steam. April and May sales and consumption numbers were strong, but corporate profits, business investment and job growth continue to decline, leading to an underwhelming Q2 GDP growth of 1.2%. Commercial real estate has enjoyed positive fundamentals and ample liquidity on the equity side, while the debt side saw some contraction in the first half of 2016, primarily in CMBS and bank financing. Banks are responding to caution and criticism from their regulators — as well as confusion over new Basel III regulation, which is being interpreted differently by lenders.

The Dodd Frank risk retention rules that take effect in December are casting further doubt about the capital requirement and structure of CMBS. As a result, CMBS issuance lagged in the first half of 2016, with only $31B versus $54.5B for the same period a year ago. This has some worried about financing for the $200B wave of 10-year loan maturities over the next three years. While some of the slack is being filled by shadow bank lenders, we expect a spike in CMBS maturity defaults if new issuance remains at current depressed levels.









20 FAST FACTS

1 Average monthly job growth fell to 116,000 from March through May, versus an average of 219,000 in the prior 12 months. June and July rebounded to stronger job formation of 287,000 and 225,000, respectively.
2 The Federal Reserve reported that all large banks passed the stress test with flying colors, meaning they can withstand $400B in losses.
3 Standard & Poor’s expects U.S. corporate default rate to rise to 3.3% by September 2016 from 2.6% a year ago.
4 Junk bond average yields are currently at 7.4%.
5 The Wall Street Journal reported that 20 of the world’s largest banks lost 25% market value in the first half of 2016.
6 The Japanese 20-year note slipped below 0% for the first time; 10-year note yields dropped to negative 0.295%.
  7 In July, the ISM index of manufacturing activity hit 52.7, down slightly from 53.2 in June, a 16-month high. New orders have risen for six straight months but fixed investment has fallen for three straight quarters.
8 On June 26, the first ship passed through the Panama Canal after a $5.4B expansion.
9 Auto sales increased 1.5% to 8.65M vehicles in the first half of 2016, but there are some signs that sales have peaked after six years of gains with sliding sales in July at GM, Ford and Toyota.
10 The 85,000 cap on H1-B visas was reached in less than five days — evidence that skilled labor is still in very short supply.
11 In 2015, nearly 1M international students came to the U.S., a 10% increase over 2014.
12 First-half 2016 CRE sales declined 16% YOY; however, record sales in 2015 were expected to moderate.
13 Personal consumption spending jumped to 1.0% in April and remained healthy with 0.4% gains in both May and June.
14 Online sales are up 10.2% YOY; department store sales are down 1.7% YOY.
15 Closed-end CRE private equity available funds, or dry powder, reached a record $236B in June.
16 CalPERS reported earnings of 0.6% for year-end June 2016 versus an investment target of 7.5% for its $295B in assets and 1.8M public service workers. Real estate returned 7.1% but was 5.6 points below its target.
17 The U.S. apartment sector is still healthy, with 49 of the 50 top markets posting rent growth in Q2.
18 In the first half of 2016, the average current pension fund investment in real estate was 8.5% versus an average target allocation of 9.8%, according to Prequin.
19 High-flying FinTech firms hit a soft patch with layoffs of 5-40% as flight to safety trims loan portfolios.
20 On August 31, 2016, Dow Jones Indices and MSCI will add an 11th sector, “Real Estate” to the Global Industry Classifications Standards, moving it out of the Financial sector. This is expected to bring $100B of inflows from equity funds into the REIT sector.
Tom McNearney

the BRIEFING is an aggregation by Tom McNearney, Transwestern chief investment officer, of other articles and reports. Tom leads Transwestern’s capital market efforts for development and investment nationwide. Tom also serves on the firm’s investment committee and board of directors, and he directs the execution and expansion of the firm’s principal investment activities across the country.

TRANSWESTERN

the BRIEFING
THE NATIONAL ECONOMY AT A GLANCE
AUGUST 2016


DISCLAIMER
Copyright © 2016 TRANSWESTERN. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from various sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.


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