Twitter Chat: Bob Bach: 5 Biggest Misconceptions in CRE Markets Today

Bob Bach, national director of market analytics at Newmark Grubb Knight Frank, joined us on CPE’s Twitter page the other day, and (in 140 characters or less per tweet) lent his 35 years of real estate market expertise to chat about the five biggest misconceptions in commercial real estate markets today.

What follows is a transcript of the exchange.

CPE: Welcome to CPE’s Twitter Chat. Today, we have with us Bob Bach. Bob is the national director of market analytics at NGKF, specializing in real estate market research, consulting and city planning.

Bach: Thank you! It’s a pleasure to be with you this afternoon.

CPE: Bob, there’s been long debate on whether the suburbs are dying as a profitable CRE investment. What are your thoughts on the matter?

Bach: The housing crisis hit the suburbs hard, taking commercial property markets with them. But recovery is underway.

CPE: Is the suburban recovery gradual or imminent, what contributes to the recovery? 

Bach: Central business districts and nearby districts are popular with millennials but they will have kids & move to burbs like their parents. Suburban office market recovery is underway. It started later than CBDs. Suburbs equal 90 percent of absorption the last four quarters.

CPE: On the flipside, everyone says that CBD office is a great investment, do you concur?

Bach: Just about any asset in a rising market like we have now is a great investment if you pay the right price, but not all CBDs are created equal. N.Y., D.C., Boston, Chicago and  Seattle equal about half of total office inventory. The Big 5 have stronger rents, lower cap rates, etc. Office markets in smaller CBDs are a mixed bag.

CPE: Would the recent low number in job hires play a factor in CBD office success?

Bach: A job equals 150-200 square feet of absorption in CBDs or suburbs. But jobs are increasing: a rising tide lifts all boats.

CPE: Is it the anchor tenants that keep malls afloat, such as Macy’s, etc?

Bach: Anchor tenants can cut best deals with landlords due to their size. Inline shops pay higher rents for foot traffic.

CPE: There is also talk that Class A assets are fully priced, what do you say to that?

Bach: Doesn’t seem like it. Prices continue to rise for trophy and class A assets despite jump in interest rates last year. The spread between average cap rate and 10-year Treasury yield remains wide historically, suggests more room for compression.

CPE: How do rents affect prices?

Bach: The question is more complex than it looks. Generally rising rent equal rising prices even if cap rate stays the same. But buyers may be willing to pay a lower cap rate because they think rents will keep rising, boosting sales price.

CPE: The M-F asset class has been at the forefront of CRE for years. Is the apartment market headed for overbuilding as a result?

Bach: Not yet. Multi-family permits are about where they were pre-recession, but they’re headed higher. Construction’s strong in many CBDs  and trendy inner-city neighborhoods. Millennials want vibrant, walkable areas.

CPE: What do you think is a top myth of the M-F sector?

Bach: Curve ball! The top myth is that the multi-family market can’t get overbuilt. It could be the first property type to be overbuilt.

CPE: Speaking of M-F overbuilding, you mean just market-rate projects, not affordable housing, correct, which is depleting?

Bach: Income and wage growth is sluggish, it creates a need for affordable housing. Market-rate projects are more prone to overbuild.

CPE: Thanks so much, Bob, for your informative input to our CPE chat!

Bach: Thank you. It was fun.