Dear Friends
of TwinRock,
Since our last letter to you, the U.S. “landscape” has changed significantly with a new party in government, rejuvenated financial markets and a rise in interest rates. While President Trump’s election has caused a rally in the stock markets for his pro-business and de-regulated government plans – the Donni-locks era can only last for so long. What is Donni-locks, but the combination of the recent Trump euphoria and a Goldilocks economy, which is an economy that is not so hot that it causes inflation, and not so cold that it causes a recession. There are no exact markers of a Goldilocks economy, but it is characterized by a low unemployment rate, increasing asset prices (stocks, real estate, etc.), low interest rates, brisk but steady GDP growth and low inflation (source Investopedia).
After the first 100 days in office are over and the euphoria wears-off that is when we can truly evaluate if and how long the president’s plans will take effect. Our view is not to fight the current momentum, but to ride the financial market wave and remain cautious if not completely removed from the U.S. real estate market. It proved to be wise to stop investing in real estate during the Fourth Quarter, as many projects imploded due to the quick and vast rise in mortgage rates.
During the quarter, the last remaining major single-family for rent investor began exiting the business as private-equity firm Blackstone Group’s single-family operator, Invitation Homes, filed for an IPO. Two other single-family for rent companies merged this week, Silver Bay Trust and Tricon Capital Group, to form greater operating efficiencies. Last month, the Wall Street Journal reported that commercial real estate deal volume decreased by $58.3 billion, or 11%, 2016, the first annual decrease since 2009, per Real Capital Analytics. Investors that were net-sellers included Blackstone, real-estate giant Brookfield Asset Management, United Parcel Service Inc.’s pension trust and Harvard Management Co., which manages Harvard University’s endowment. Brookfield sold more than $3 billion of property in 2016, double the prior year.
During the quarter, the last remaining major single-family for rent investor began exiting the business as private-equity firm Blackstone Group’s single-family operator, Invitation Homes, filed for an IPO. Two other single-family for rent companies merged this week, Silver Bay Trust and Tricon Capital Group, to form greater operating efficiencies. Last month, the Wall Street Journal reported that commercial real estate deal volume decreased by $58.3 billion, or 11%, 2016, the first annual decrease since 2009, per Real Capital Analytics. Investors that were net-sellers included Blackstone, real-estate giant Brookfield Asset Management, United Parcel Service Inc.’s pension trust and Harvard Management Co., which manages Harvard University’s endowment. Brookfield sold more than $3 billion of property in 2016, double the prior year.
Caution among investors in the $11 trillion U.S. commercial-property sector is being driven by many reasons — “lofty prices, the length of the market cycle so far and the recent rise in interest rates, which makes bonds look more attractive compared to commercial property. Also, developers are adding new supply of certain property types at the fastest rate since the recovery began” per the WSJ. “We think now is an opportune time to reduce some of our exposure to that asset,” said Brian Kingston, Brookfield senior managing partner. “We can recycle the capital into higher returning investment opportunities.”
We couldn’t agree more with the statement from the Canadian firm above and as we continue to focus on our investment fund in pursuing Canadian real estate opportunities. Following my trip last week to Alberta, Canada, the timing is ripe to invest!
We look forward to sharing our thoughts again in our next quarterly report. In the meantime, should you have any questions, we look forward to hearing from you.
Very truly yours,