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HFF Research Update for March 24, 2016: A Great Escape

Thursday, March 24, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website or access the HFF Daily Rates App in iTunes.

On this day in 1944, 76 Allied Forces inmates at Nazi Germany's Salag Luft III prisoner of war encampment escaped via tunnel in what was later memorialized in the film The Great Escape. Only three escapees evaded capture, and 50 were summarily executed.

Digging three tunnels named Tom, Dick and Harry, the inmates were able to hide the use of 90 bunk beds, as many mattresses and bedding sets, more than 100 chairs and benches, some 50 tables that could seat 20 men each and more than 1,000 forks and spoons used painstakingly to dig the tunnels.


Analysis of Market Insights and Economic Performance

Probably the most ingenious method in the tunnel building process was the distribution of approximately 400,000 pounds of excavated sand and dirt across the prison grounds. One could say the discreet displacement of such a massive quantity of material is something the modern-day investor should appreciate in as much as they are benefitting from it. To wit….

In the summer of 2013, then-Chairman of the Federal Reserve Ben Bernanke gave investors the impression the FOMC would cease its third round of quantitative easing, which had come in the form of large-scale, fixed-income asset purchase to provide stability, if not air, to bond prices, thereby keeping/driving interest rates and bond yields low. The investing world expected interest rates to rise almost immediately, reflected in the 140 basis point increase in the 10-year UST yield from May through the end of that year. After all, without the FOMC's significant buying pressure, yields were expected to behave with more normalcy.

Later came the additional consideration of untying the knot of assets the Federal Reserve had on their balance sheet. Selling down the $3.5 trillion asset base they had accumulated would reverse the significant buying pressure they had afforded to the marketplace into significant selling pressure. Surely yields had bottomed and would begin rising? Not so fast.

A year later, China became a net seller of its $3.9 trillion in foreign exchange reserves, including U.S. Treasury bonds, and accelerated its sales last year when its stock bourses began convulsing. Again, a major institution was reversing significant buying pressure into significant selling pressure. Surely yields had bottomed and would begin rising? Not so fast.

In spite of the redistribution of bonds to the broader investment markets from large holders, the yield on the 10-yearUST remains quite low -- currently below 1.90 percent. Reasons include increased regulation of the banking sector requiring a heavier base of risk-free assets (FIG buying up USTs) and a flight to quality driven by global geopolitical turmoil and volatility in stock and corporate bond markets.

Consumer prices excluding food and energy (known as Core CPI) have risen 2.3 percent over the past year. With a revision to 4Q15 GDP tomorrow and March payroll creation coming next Friday, the FOMC will have more to chew on when they meet next month.

In the meantime, it feels very much like a "Great Escape" for commercial real estate investors. And if it doesn't, it should. Make hay; November approaches and allocations remain competitively priced.


About Jimmy Hinton

HFF Jimmy HintonMr. Hinton serves as Managing Director of HFF, responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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