by Kevin Thorpe, Global Chief Economist
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Although volumes lag slightly compared to last year, they remain at near-record highs and we anticipate a strong second half of the year. Where are we? Think of it as the end of the easy times, not the end of the good times.
No Shortage of Capital
One of the metrics I like to watch is the global M2 money supply. Who doesn’t? The M2 is the total stock of all forms of currency circulating in the world at any given time. It’s a big snapshot, and you can see capital still climbing aggressively this year. The Eurozone, Japan, Greater China, and many other central banks are still creating new sources of capital through their various monetary stimulus programs.
In the past decade, about 2.2% of the global money made its way to CRE. Right now, it’s only 1.1%. Why is it down? Primarily because since Brexit and Trump, a disproportionately higher percentage of the M2 has gone into the stock market. But if this reverts back to the norm, and it usually does, we may very well see another surge of capital targeting CRE.
Fundraising for CRE remains absolutely spectacular. Even though volumes will be off 10% year-over-year, they remain at near-record highs, and we’re anticipating a strong second half of the year for the capital markets.
Following the Money
Where will capital go? We don’t really have to guess. There are the 30 top-tier markets where the bulk of global capital has generally wanted to be over past the past decade.
From an investor perspective, these cities are the best of the best. What makes them so special?
- Capital preservation. These are some of the safest cities in the world to invest your money because they are so large and so liquid.
- Growth. These cities consistently rank near the top in virtually every single relevant economic metric (GDP, job growth, population growth, etc.).
Still, we are seeing changes, as investors become increasingly mindful of the elevated valuations in many markets, especially global gateways. However, they equally appreciate that global growth has become more concentrated in these same centers. As a result, appetite is unlikely to meaningfully diminish for global gateway product going forward, but it will become more discerning as returns become increasingly asset-specific.
The tremendous depth of the top-tier markets is a key sustaining advantage in this respect. Expect greater attention to be directed at heretofore ignored submarkets. Similarly, return-oriented investors are increasingly shifting allocations to global secondary markets where economic recovery is generally at an earlier stage and yields remain elevated.
All in all, this remains both an attractive and exciting time to invest in commercial real estate, but also one that will require greater adaptability on the part of investors. Where are we in the cycle? Think of it as the end of the easy times, not the end of the good times.
Kevin is Cushman & Wakefield’s Global Chief Economist, focusing on global economic trends and forecasts. He and the firm’s worldwide research team produce studies and statistics on topics affecting the global and U.S. economy, capital markets, finance, leasing fundamentals, property and project management and factors that affect supply-demand fundamentals in commercial real estate. Kevin has developed several econometric models to predict market trends, is a member of the National Association for Business Economics (NABE), and has authored numerous studies and survey reports. In 2014, he was recognized as the nation’s most accurate economic forecaster with the NABE’s Outlook Award.