Welcome to my newsletter!

Sunshine Corner is SRR Consulting’s bi-monthly newsletter with updates, news, and Sara's views on the US economy and commercial real estate.

Issue 2024:3

It’s the April full moon, so it’s time for the next Sara’s Sunshine Corner.

I hope you enjoyed the solar eclipse after reading my last newsletter. I walked to Central Park from the ULI Spring 2024 Meeting in Midtown to check it out. It was a cloudy day with 90% of totality in New York City but still a lovely day in the park.

ULI Dispatch

The Urban Land Institute (ULI) holds incredible meetings. They tend to be so packed with content and attendees that it is impossible to experience everything of interest. My time at the Spring Meeting was largely spent meeting with a group of fellow researchers and attending my council events.

The research meeting I attend is essentially all real estate researchers who are also ULI members. Most of them also submit forecasts to the ULI Real Estate Economic Forecast, for which the consensus results are released at the conference. The ULI consensus forecast covers dozens of economic, capital market, and real estate market indicators.

For the next section of today’s newsletter, let’s take a walk through the outlooks for a few key indicators with notes from my experiences at ULI and the view at SRR Consulting.

Interest Rates, Cap Rates, and Treasuries, Oh My!

The research meeting was lit. When a bunch of researchers get together, we don’t have a “quiet one”. We have lots to say and the topic that kept us going was interest rates.

The range of expectations emerging from the group was 0 to 3 federal funds rate cuts in 2024, sparking considerable debate. The March CPI release on the following morning had some attendees circling back over email to wonder if one hike should be added to the range of possibilities. It is truly anyone’s game at this point.

The baseline at SRR Consulting is one interest rate cut in 2024, likely at the June or July meeting. Risk around this outlook leans toward tighter policy with no rate cuts this year. Sticky inflation, in my view, is more likely to keep the Fed in a holding pattern than spur a rate hike.

I also place a higher probability on sticky inflation than significant weakening in the labor market, with the latter increasing the likelihood of multiple rate cuts.

The ULI survey includes a consensus view on the 10-year US Treasury rate (10YT) and NCREIF appraisal capitalization rate (cap rate). For the 10YT, consensus expectations are for a 36-basis point (bps) decline through 2026. This slow downward trend implies that the federal funds rate would also edge down slowly through 2026. I agree.

NCREIF appraisal cap rates tend to be lower than average market cap rates because they reflect higher-quality properties held by institutional investors. Also, appraisal valuations lag property sale prices, moving up or down, because examining prices from recent, comparable property sales is a key component of conducting an appraisal. In the current market, this means appraisal cap rates are much lower than market averages.

So, knowing that the NCREIF appraisal cap rate averaged 4.6% in 2023 does not help with pricing an asset when the CBRE US Cap Rate Survey H2 2023 reports an average market cap rate of 7.0%. But the fact that the NCREIF appraisal cap rate has increased by 60 bps from 2022 says quite a bit about real estate values.

Quick real estate math: for a property valued at $100 million, a 4.0% implied appraisal cap rate means that the property generates $4 million/year in net operating income (NOI). Assuming property NOI was unchanged from 2022 to 2023, a 60bps increase in this cap rate means the property value declined by 13.0%.

The ULI consensus forecast expects NCREIF cap rates to peak at 5%, then flatten. I agree with this pattern. SRR Consulting expects the interest rate-related reset in real estate values to bottom out in 2025, with variations by property type and location.

Last Free Issue!

Subscribe! This newsletter can’t be free like actual sunshine, but Sara’s Sunshine Corner is priced at $10/month or $100/year to allow anyone with interest to sign-up.

Subscribe by May 1! All paid subscribers will receive the inaugural issue of SRR Real Estate Quarterly on May 3 for free! Just this once, as a treat.

Getting one SRR REQ for the low, low price of a Sunshine Corner subscription is a steal! Like office space in San Francisco.

Thanks for reading!

Fun Facts: Sunshine marks the start and end of each day and illuminates the moon to mark the start and end of each month. New data covering the economic and demographic drivers of real estate performance are released at differing monthly and quarterly cadences such that an important data release occurs at least once a week. It is chaos. To build this newsletter's calendar, I chose to follow sunshine and release this newsletter twice per month, at the start (new moon) and end (full moon) of a lunar month. Problem solved. 🌞