Cap Rate Compression and the multiple Fed rate hikes will continue into 2018--yet fundamentals in the broader market remain strong
2017 CRE market continued its endurance and strength into the new year even as Cap Rates compressed even further, with spreads narrowing to the 10 year T-Bond to the lowest levels in a decade. After three consecutive Fed rate hikes last year, 2018 appears to be a year where continued value hunting as yields are threatened. While the traditional office building market has seen momentum in many of the largest cities further disrupted by non traditional players like WeWork and other 'space as a service" business models, the residential and multi family markets continue to see mark to market rent jumps that imply considerable demand into 2021 and beyond.
The biggest losers in 2017 were office REITS who are trading at a 4% discount to NAV and regional malls whose future all but seem to have been shorted and trade at a 30% discount noted Deloitte's annual CRE missive. The stock of CBRE, JLL and Newmark (pre BGC spin out) have all performed near the S&P 500 average of >25% in the last 52 weeks making their groups performance the FANG of commercial real estate.
CRE Tech Startups are transforming the economics of space for REITS and investors alike. This trend will continue into 2018
Technology and the role that it is playing in the CRE market continues to be the story of the year, with Venture tech startups (WeWork is still considered a startup with its massive $20Billion valuation) garnering over $12Billion in fresh capital in the US market. VTS, Compass, Honest Buildings, Measurabl, Cadre, the list goes on and on in a sweeping trend that has even gotten stodgy landlords to actively invest in venture tech deals. Some of us are looking for consolidation of technology in 2018 with the convergence of software, sensors, IoT and data analytics platform mergers.
Who will be first venture startup to add a third dimension to their tech strategy by actively acquiring competitors whose balance sheets are thin?
Global CRE Platforms M&A focused on further consolidation and tech partnerships in 2017.
Who will they acquire in 2018 and will it include a notable technology platform?
Almost left behind in the years news was any transformative M&A from the worlds largest CRE services platforms--> CBRE, JLL and C&W seemed to temper their acquisitions in 2017. Dark horse, Newmark went public in December to a market leading valaution in the sector, beating rumors that TPG was positioning C&W for a public offering in 2017, now slated to be planned for Q3 2018. While JLL created Spark and has invested in tech syndicate Concrete in Europe, CBRE has committed $20M to Fifth Wall and acquired Floored in late 2016, but these global groups continue to pivot back to their core offerings for scale and comfort. Newmark seems poised to break the mold with a technology centric strategy and could put their $350Million raised in their IPO to work into both M&A and venture investments.
What does this mean for M&A transactions in Brokerage, FM, Valuations, Energy and other services?
2018 is forcasted to be a healthy year for acquisitions for the strategic global CRE platforms above and the bevy of private equity investors that have now invested in the sector since the recession. Every metric of valuations are at historic highs for public and private comps. Numerous $100Million+ deals are expected to hit the market on the sell side in the Q1 and Q2 leading to further demand for smaller cap players to exit in the frenzy.