Panel, Conference Presentation
Global Real Estate Outlook: A More Attractive Asset?
Milken InstituteBarry Sternlicht, Eric Adler, Rick Caruso, R. Donahue Peebles, Ross Perot, Jr., Sam Zell
- Barry Sternlich anticipates that if fiscal stimulus drives the U.S. economy, rates may rise marginally, but this could be acceptable if rents and baselines increase, with a forecast that Trump will pass tax cuts reducing corporate rates to 15–25% and estate taxes to zero within the current year, though deductibility of state income taxes in high-tax states like California and New York may be eliminated; conversely, he notes that if rates rise due to a two-trillion-dollar deficit or supply overhang, real estate performance could suffer.
- Barry Sternlich predicts a base case of returning inflation, economic growth, and wage growth which would raise replacement costs and rents, citing Detroit's apartment market as currently having the lowest vacancy rates and highest rental growth, though he acknowledges prices are high for his fund, forcing net sales despite a desire to buy.
- Eric Hargreaves expects interest rates to remain low with three percent being normal, noting that labor inflation is a significant challenge for developers, while observing that capital flows since the global financial crisis have been record-breaking but arbitrage opportunities are closing as transaction volumes lag behind investing intentions.
- Eric Hargreaves forecasts that global capital flows have flattened out due to reduced money entering the market compared to early last year, identifies Asian money as particularly aggressive with China being the most active, and holds a sanguine view regarding Europe's strength, specifically predicting Le Pen will not pass in France and Mexico will strengthen under Trump's policies.
- Sam Zell predicts the real estate cycle is ending due to a significant oversupply of capital relative to demand in the U.S., forecasting that the 10-year rate will rise slightly from 2.32% to 2.33% within 12 months and that the Fed may sell $3 trillion to $5 trillion of assets over the next 12 to 24 months.
- Sam Zell suggests the U.S. administration has an extraordinary opportunity to create massive stimulus through deregulation of financial institutions to fix constraints and enable better business decisions, but warns that the overall market performance is likely to be lower rather than higher due to benign conditions and potential Venezuelan economic collapse impacting Colombia.
- Rick Caruso projects that brick-and-mortar retailers providing exceptional experiences will flourish while price-competitors and indoor malls will fail unless reinvented, with his portfolio growing at an 8% clip in New York despite slower velocity and lower prices, and plans to open the old Miramar Hotel in June 2018 as a unique five-star beachfront property in Southern California.
- Rick Caruso forecasts single-family rental yields to remain high with same-store sales growth of 6% and margins comparable to apartments at 65%, while expecting a revival in old main streets and towns benefiting hotel, residential, and retail classes.
- Ross Perot expects Uber to pioneer human-delivered drone logistics over the next three to four years in Dallas-Fort Worth and predicts driverless trucks and cars will significantly impact real estate distribution patterns and reduce parking demand within 10 to 15 years, potentially creating zero-basis real estate.
- Ross Perot identifies the industrial market as strong due to Amazon's boom with eight buildings in production and negotiations for another eight or nine, anticipating Walmart and other retailers will need fulfillment presence to compete, while noting a labor shortage in Texas is constraining new high-rise office developments.
- Ross Perot forecasts driverless cars could be available in Arizona within a year, contrasting with California's regulatory environment, and believes the industrial market remains solid with no immediate slowdowns despite the changing delivery landscape.
- Eric Hargreaves identifies London office as the greatest short investment globally, followed by Tokyo office which is massively overbuilt due to zero interest rates, and anticipates that a major geopolitical conflict in Asia could drive rates down, making income assets a store of value.
- Eric Hargreaves expects Brexit to significantly impact central London equity markets but sees opportunities in mezzanine products due to bank caution, while viewing demand in Poland as good and Germany as okay, highlighting value-added opportunities across continental Europe.
- Barry Sternlich notes that the 10-year Treasury rate is lower than on January 1, 2016, and attributes this to factors including potential large short squeezes, while maintaining that GDP growth will be steady in the first quarter with marginal rate increases over the next year.
- Eric Hargreaves believes labor inflation is the biggest problem for developers, while Ross Perot cites a similar labor shortage in Texas that prevents building enough houses and hesitates regarding new high-rise office projects in Dallas-Fort Worth.