Net Takeaways with Feller & Harf

Cap Rates, Groceries & Hurricane Milton: The Wild Ride of CRE in 2024!

Episode Summary

Episode Summary: In this episode of Net Takeaways, Bryn Feller and Isaiah Harf delve into key topics shaping the commercial real estate market. They begin by discussing the significant imbalance between market supply and demand, analyzing projected full-year transactions. The hosts highlight the retail sector, particularly grocery-anchored retail, which they describe as the "hottest" part of the market today, likening it to the industrial sector's boom of previous years. Bryn and Isaiah also explore the implications of rising inventory levels in net lease retail, emphasizing that cap rates will need to increase further to clear the current market stock. The conversation shifts to 1031 exchanges and the shrinking presence of tax-motivated buyers, with projections that yield-motivated investors will play a larger role in 2025. Finally, they discuss the Federal Reserve's recent actions, noting how the market is reacting to economic indicators, particularly the 10-year treasury, oil prices, and the geopolitical situation in the Middle East. The episode concludes with lighthearted banter about Hurricane Milton and its impact on Florida. Key topics covered: - Market supply-demand imbalance and inventory growth in net lease retail. - The importance of cap rate adjustments to clear current market inventory. - Grocery-anchored retail as the hottest segment in commercial real estate. - Diminished impact of 1031 exchanges and future market trends. - Reaction to Federal Reserve actions, 10-year treasury, and oil price dynamics. Listeners will gain insights into the future direction of the commercial real estate market, the evolving role of grocery retail, and potential investment opportunities in 2025.

Episode Notes

Episode Notes:

Title: Market Imbalances, Grocery Retail Boom & The Fed's Next Move

Hosts: Bryn Feller and Isaiah Harf

Episode Overview: In this episode of Net Takeaways, Bryn and Isaiah cover major trends in the commercial real estate market, focusing on key shifts in supply and demand imbalances, the grocery retail segment, and the Federal Reserve’s influence on market movements. Here are the main takeaways:

1. Market Supply-Demand Imbalance

• The hosts analyze the growing inventory in the net lease retail market, which has surged from $9 billion in 2022 to over $24 billion in 2024.
• The imbalance between available inventory and actual sales is stark, with projected full-year sales for 2024 at just over $10 billion, representing only 40% of the available inventory.
• Bryn and Isaiah discuss how cap rates need to rise further to help clear inventory and create stability in the marketplace.

2. Grocery Retail: The Hottest Segment

• Grocery-anchored retail is the current "hot" segment in commercial real estate, drawing interest from institutional investors, family offices, and private investors.
• The trio of grocery real estate categories—single-tenant, multi-tenant, and shadow-anchored centers—perform differently, with all segments remaining strong despite inflation concerns.
• The hosts attribute the strength of the grocery sector to its essential nature in driving foot traffic and supporting service-based retail, which has helped brick-and-mortar retail stay relevant.

3. Shrinking 1031 Exchange Participation

• 1031 exchanges, which previously accounted for 60-65% of the net lease market, are now down to around 15-20%.
• The hosts explore how the market is adapting to fewer tax-motivated investors and the emergence of yield-motivated buyers. They predict that 2025 will be a banner year for opportunistic investors, with substantial profits likely in both retail and office sectors.

4. Federal Reserve, 10-Year Treasury & Geopolitical Risks

• Bryn and Isaiah discuss how the market has pre-empted the Federal Reserve’s actions, with the 10-year treasury yield reacting more to economic forecasts than to the Fed’s moves.
• They anticipate oil prices could rise further due to geopolitical tension in the Middle East, potentially leading to inflation spikes that could delay rate cuts.

5. Lighthearted Banter:

• The episode concludes with a humorous segment about Hurricane Milton, the hosts’ personal routines, and a reference to BJ’s late grandfather. Despite the seriousness of the storm's impact, the conversation provides a fun and humanizing moment.

Key Quotes:

• "The real 800-pound gorilla isn’t Chairman Powell, it’s inventory levels. Cap rates have to rise if we want to clear this stock."
• "Grocery-anchored retail is the hottest thing out there right now. It’s the industrial of three years ago."
• "2025 will be the year we look back and say people made a killing by buying in this market."

Actionable Takeaways:

• Investors should keep a close eye on cap rate movements as the market seeks balance.
• Grocery-anchored retail remains a safe bet for long-term growth and stability.
• While the future of 1031 exchanges remains uncertain, yield-based investment opportunities abound.
• Be mindful of the impact that global events, particularly oil prices, may have on inflation and the Fed’s next moves.

Next Episode Preview: In the next episode, BJ and Isaiah will dive into new trends in logistics real estate and discuss whether the industrial sector will continue its upward trajectory or face new headwinds.

Closing Remarks: Like, share, and subscribe to Net Takeaways with Feller & Harf on your favorite podcast platform. Stay tuned for more insights into commercial real estate and market dynamics.