At the end of each year, the senior team at Brennan Investment Group gathers to look forward to the upcoming year. This year, we spent a weekend with our spouses at the Waldorf Astoria in Chicago. I gathered with the other senior managers in a hotel conference room where we discussed the economy and our strategic initiatives for the upcoming year. I heard some interesting thoughts, which can be summarized as follows: There will be a bull market in everything this year, with everything being expensive and returns running low.
Here’s a recap of our two-hour meeting and market update from Mike Brennan, one the smartest guys in the business I know.
- Money, money everywhere. There’s a liquidity gut. There are few “value” investment deals on the market, which makes finding a good deal challenging. The population is ageing, which translates into more people wanting to put money into the real estate market as they are set to retire. Corporate balance sheets have a lot of cash and few alternatives for the kind of returns we used to take for granted. Companies have a lot of money sitting on the sidelines. Add in the banking industry is in grade shape.
In short: There is a lot of money on the sidelines available for investment into alternatives like industrial real estate – values should stay high for 2019 (barring a black swan event.)
- Absorption for warehouse space is continuing and should continue – with 61.4 million square feet of warehouse space absorbed during the third quarter. But construction of warehouse space is slowing in the face of strong demand – which is fascinating.
- E-commerce remains a big driver. There are 2 billion square feet of warehouse space needed by 2020 for e-commerce fulfilment. Roughly 200 million square feet of space per year is absorbed by e-commerce, a number that will surely grow.
- Pension funds customarily drive commercial real estate investment and development (to a large extent). Expect pension funds to increase their allocation into the commercial real estate investments. The reason can be traced to the fact that defined benefit plans have to generate at least 7 per cent annually. This is a challenge in the current low-yield environment we are in in the bond markets. This means pension funds are eyeing commercial real estate more aggressively as it can produce higher returns. CalPERS, or California Public Employees Retirement System, made a really big move recently to increase their allocation into real estate by over 30%, and what CalPERS does, other pension funds follow.
As for me, I’m looking forward to a year of deals and an increased focus on asset finding good investments and development opportunities.