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The Flattening Yield Curve Just Produced its First Inversion

December 10, 2018



The Flattening Yield Curve Just Produced its First Inversion

One section of the U.S. Treasuries yield curve just inverted for the first time in more than a decade. The spread between 3- and 5-year yields fell to negative 0.6 basis points Monday, dropping below zero for the first time since 2007. It’s not the best-known measure of the curve. The 2- to 10-year gap is more closely watched as a potential indicator of pending recessions. But Monday’s move could be the first signal that the market is putting the Federal Reserve on notice that the end of its tightening cycle is approaching. Some analysts attributed the short-end underperformance to demand for riskier assets as global trade tensions eased following this weekend’s tariff truce between U.S. President Donald Trump and China’s Xi Jinping. Others pinned it to modestly higher expectations for Fed hikes next year after the summit between the two leaders. Either way, the five-year is faring better because investors anticipate the end of the central bank’s hiking path beyond next year. “The outright inversion could be reflective of the market pricing in some cuts starting in 2020, which may be helping the 5-year tenor outperform slightly,” said TD Securities rates strategist Gennadiy Goldberg. The spread between December 2018 and December 2019 eurodollar futures -- a measure of how much tightening traders expect next year -- reached 27 basis points overnight, meaning just more than one quarter-point Fed hike. It was last at 24.3 basis points, about 1.5 basis points higher than Friday. “It’s a risk-on move, and the relief trade we’re seeing has allowed the front-end to reprice higher,” said Marty Mitchell, an independent strategist. Curve flattening over the past two years has signaled investors’ concern that rising rates against a backdrop of slowing global growth could harm the U.S. economy. Inversion -- where yields at the short end rise above those at the long end -- has been a reliable indicator of recessions. Some analysts cautioned against reading too much into Monday’s inversion. “It’s a minor part of the curve,” said NatWest Markets strategist John Briggs. “I don’t think it necessarily foreshadows anything.” But other parts of the yield curve are also pushing flatter. The 2- to 5-year curve was less than a basis point from inversion Monday. And the spread between 2- and 10-year rates -- arguably the most closely watched section of the curve -- dwindled below 16 basis points, the flattest since 2007. For BMO Capital Markets, 10 basis points is the next level to watch. “The combination of a committed FOMC and mounting global economic headwinds puts the curve below zero as 2019 gets underway,” analysts including Ian Lyngen wrote in a note. “If not then, the March FOMC meeting becomes the most opportune inflection point.” (Bloomberg)



ICSC Speaker: E-Commerce Did Not Cause Dept. Store Woes

Nick Egelanian, the founder and president of the retail real estate consulting firm SiteWorks, said every time he turns on the TV, cable or network news, or reads any trade, business or general newspaper, everyone blames e-commerce for the decline in retail. But he says it’s misinformation. Total retail sales are approximately $5 trillion in the US. Egelanian noted internet retail accounted for 9.7% of sales in the second quarter of 2018. By 2022, this figure is projected to be 15%. Amazon’s total worldwide sales for all businesses reached approximately $179 billion in 2017. When deducting international sales, IT services like cloud storage, and other businesses including for other vendors on its site—Amazon’s e-commerce in lieu of brick-and-mortar sales amounted to about 1% of US retail, he said. So what caused the decline in retail—Sears’ bankruptcy, the shuttering of Henri Bendel, and the closures of Lord & Taylor and J.C. Penney stores? Egelanian addressed such trends, speaking at the International Council of Shopping Centers (ICSC) New York Deal Making conference on Tuesday. “I call it deconstruction of the department store. I hate when they talk about disruption because those people who disrupted are us,” he said. “We took apart the department stores and created big boxes.” This included linens, shoes, automobile services, specialty foods, pet supplies, electronics, almost every product one could imagine in a department store. The retail real estate services advisor said it started with Toys R Us in the 1950s. This grew throughout the 1970s and by the 1980s it was a trend. In 2007, value retailers (for example, TJ Maxx and Ross) had $18 billion in sales and department stores had $85 billion. By 2016, the value retailers grew to $75 billion and department stores had dropped to $26 billion in sales. “It makes common sense. Things that were sold in department stores are now sold in big-box stores,” Egelanian said. He predicted more change in the next three to five years. “As soon as big boxes are done killing what’s left of the department stores, they will no longer grow. They will also reach maturity in an industry that is largely mature.” He asserted the internet is altering retail but is not the cause of the department store demise. Egelanian said Amazon actually loses money with its e-commerce but makes a healthy profit with its other businesses in technology, entertainment, advertising and shipping. Amazon is a vendor, acts as a third party distributor for other vendors and also provides marketplace listings where it is not involved in the distribution. While department stores are closing, value retailer Dollar General opened 1,300 stores last year. Income disparity is real, he said. “They are opening stores catering to the lowest end of the market, a vastly growing portion of America that buys paycheck to paycheck.” Of retail, 85% is commodity retail or invisible retail, what people use and replenish using essential household funds. “The primary function of retail is to distribute goods and services that people need to live,” he said, adding nobody talks about this because it’s not particularly sexy. The other 15% of retail is discretionary retail what most people in the industry discuss. It’s based on how good the shops are and the quality of the products. It’s the experiential retail, with conversations of how creativity and innovation will save retail. Egelanian pointed to Rodeo Drive and Disney World as unique examples. He asked how many people in the room shopped at Walmart in the last month. Approximately 15% of the audience raised their hands. He noted there are 4,700 Walmarts in the country and they have 27% of the grocery business in the country. Egelanian stated most of the professionals in real estate are financially in a different position than 75% of the rest of the population. But he added “It’s the invisible part of retail that’s the busiest.” (



Crescent Pays $125.25M for Springs Portfolio

A more-than-1 million square-foot, 13-building office portfolio in Colorado Springs recently sold for $125.25 million. The sale of the Class A portfolio, comprising 1.02 million sf of office space across buildings located in various business parks in the city, sold to Crescent Real Estate LLC, according to public records. Patriot Equities sold the portfolio. “Colorado Springs continues to attract national interest due to its significant growth dynamic, increasingly diverse economy and low-cost alternative when compared to Denver,” said Aaron Johnson of Cushman & Wakefield Denver’s Capital Markets group. “The institutional price point coupled with multiple buildings within the portfolio suitable for private capital gave us great exposure across both buyer pools. The buyer recognized the value of the portfolio, the product mix providing diversified tenant options and multiple exit strategies.” Johnson and Jon D. Hendrickson, managing directors of the Denver Capital Markets group, along with the firm’s New Jersey and New York City offices, represented the seller in the transaction. The portfolio is located in various business parks in the north and southeast/airport submarkets, including InterQuest, Patriot Park, Aerotech and Peak Innovation Park, and all feature “excellent” identity and access to major north-south thoroughfares such as Interstate 25 and Powers Boulevard. Included in the office portfolio were:

• A five-story building at 10807 New Allegiance Drive in InterQuest. Built in 2009, the multitenant building comprises 145,694 sf and was 88 percent occupied.

• A single-story, 74,005-sf building at 9945 Federal Drive, also in InterQuest. Built in 2009, the multitenant building was 100 percent occupied.

• A single-story, multitenant building at 9925 Federal Drive in InterQuest. The 54,057-sf building was built in 2008 and was 91 percent occupied.

•A 66,222-sf building at 9950 Federal Drive in InterQuest. The single-story, multitenant building was built in 2001 and was 100 percent occupied.

• A single-story, 46,948-sf building at 9960 Federal Drive in InterQuest. The multitenant space, built in 2001, was 65 percent occupied.

• A 103,183-sf, three-story building at 985 Space Center Drive. Built in 1989, the multitenant property in Patriot Park was 49 percent occupied at closing.

• A 33,190-sf building at 980 Technology Court in Patriot Park. A single tenant occupies the entire one-story building constructed in 1984.

• A single-tenant, two-story building at 745 Space Center Drive in Patriot Park. Constructed in 2006, the 51,770-sf building was fully occupied.

• A vacant, 103,970-sf building at 655 Space Center Drive. The building in Patriot Park comprises three stories and was built in 2008.

• An 89,907-sf, three-story building at 565 Space Center Drive in Patriot Park. The multitenant building, constructed in 2009, was 72 percent occupied.

• A multitenant, two-story building at 1055 N. Newport Road in Aerotech. The 59,763-sf building was 76 percent occupied and built in 2008.

• A 67,640-sf building at 1670 N. Newport Road in Aerotech. The four-story, multitenant building was built in 1987 and was 96 percent occupied.

• A three-story, single-tenant, fully leased building at 3535 Northrop Grumman Point. The building, part of the Peak Innovation Park, was constructed in 2008. It comprises 124,305 sf.

With 700,000 sf of office construction between 2006 and 2009 and 10 of the 13 buildings constructed after 2000, the opportunity delivered a unique ability to control the most desirable office product in a growing market at a significant discount to replacement cost, said Johnson. Additionally, the portfolio features attractive architecture and design, along with flexible and efficient floor plates. Five of the 13 buildings also are designated LEED Silver or better. At the time of sale, the portfolio overall was 77 percent leased across industry sectors that included aerospace, government, military and defense contractors, technology and health care. “The buyer was able to recognize the growth in the market and the value of the portfolio,” added Johnson. “It has a good, diverse mix of geographic and product type.” There was a significant amount of interest in the portfolio on a national basis due not only to the size of it and the institutional price point but also the diversity of market, population growth, the city’s expanding tech and health care components, future growth potential of the city and Colorado Springs’ cost compared with Denver, Johnson noted. Calls to the buyer regarding the acquisition were not returned by press time. (Colorado Real Estate Journal)



Multitenant Office Building in Golden Trades at $10.63M

A Golden office building sold for $10.63 million, or $173.61 per square foot, to a California-based real estate investment management company. Alvarez & Marsal Capital Real Estate LLC, the real estate investment management arm of professional services firm Alvarez & Marsal, bought the two-story building at 651 Corporate Circle from Denver-based Ogilvie Properties. Cooling Tower Depot, Illfonic and Stanek Constructors are the largest tenants in the 100 percent-occupied building. There were four offers for the building within the first three weeks of the offering, according to JLL Executive Vice President Patrick Devereaux. Devereaux and Jason Schmidt, also of JLL, represented the seller. “We had very, very quick and strong demand for the asset,” said Devereaux, who added interest came from both local and out-of-state investors, some in 1031 exchanges. “The building is in fantastic capital condition,” he said, adding it also offers “tremendous highway access” and a high parking ratio at 4.2 spaces per 1,000 sf. “It’s a historically well-performing asset in west Denver, which is an infill location that investors like to place capital in,” Devereaux commented. Ogilvie Properties added value to the property by creating strong occupancy and tenancy, he said. “Ogilvie did a tremendous job repositioning this asset from the previous ownership.” (Colorado Real Estate Journal)