4/24/2018 0 Comments Transformation of Retail LocationsWith hundreds of retailers closing down stores across the country, malls have witnessed a sad reality in the modern world: foot traffic is declining. Online sales are cannibalizing on sales of retail stores, a story that is hardly new to most investors. While there is a negative investment stigma associated with malls, the recent transformation in investment should be watched carefully.
Major owners of strip malls, such as the Federal Realty Investment Trust, are aware of the outlook and closings. Mall tenants in popular locations have re-strategized to transform malls into entertainment locations, shifting from retail-focused tenants. Amongst these new tenants are gyms and fitness centers. Market data suggests that implementation of boutique gyms draws more affluent customers and fit closer into the newly established parameter. Fitness centers have also been attractive due to market growth; memberships of health clubs have jumped 26% since 2009. As a result of these factors, landowner of over 115 malls, GGP, wants over half of its malls to contain fitness centers by the next decade, and Phillips Edison & Company has already implemented fitness centers in over 40% in its 340 grocery-anchored shopping centers. Nevertheless, Retail property landlords are overwhelmingly suffering at the moment while this transition takes place. Tenants are taking advantage of store closures and bargaining for cheaper and more flexible leases. An aggressive growth in this behavior could prove the transition to entertainment difficult. Keith Knutsson of Integrale Advisors commented, “A shift of strategy in a failing business is to be expected. If foot traffic is permanently affected by online sales, a pivot is needed.”
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Events that have recently been triggering the market have stimulated investor curiosity around the relationship between government bonds and the returns of equities. Looking back, the S&P 500 took a major downturn in January and February of 2018 due to poor market conditions. Not only that, but the 10-year government bonds also showed a positive trend from 2.6% - 2.8% in the beginning of the year. The reputation of bonds as a “safe-haven” asset during a time of crisis is being questioned by investors all around the world today.
With the recent rise in bond yields due to positive results in hourly earnings numbers and payroll, investors reassessed their outlook on inflation. This was backed by a slight increase in bond yields. Simply put, investors believe the shock started spreading from the equity market from the gecko. This is truly inaccurate and a major misconception as the shock emanated primarily from the bond market instead of the equity market. In theory, the relationship between bonds and stocks largely depend on whether a shock starts in the bond market or stock market. It is important to note that bond market shocks induce a positive stock-bond relationship, whereas equity market shocks prove a negative relationship due to the association with the flight-to-quality (FTQ). Government bonds have shown strong performance in nearly all types of economic recessions regardless of investors deciding to be proponents of this theory or not. These bonds have not only shown growth in the last six decades but have also served to act as a way to hedge against pro-cyclical equity exposure. We use equity prices to better understand the value of a set of discounted future cash flows. There is a major impact on the discount rates due to a shock in the real bond market. This lowers the stock price and increases equity yield thus capturing higher real rates. However, whenever FTQ occurs aka a negative shock in the equity market, bond yields fall as the bond market seems much more favorable to investors. Looking at equity risk premium, FTQ occurrences seem to be related to a slightly noticeable negative stock-bond relation, while real yield shocks result in a positive market correlation. When markets are expensive, equities become vulnerable to negative bond market shocks and rises in bond yields. Moving forward, this rise in bond yields will serve to be a risk that investors should be aware of and must consider when flocking to either side of the market in search for safe-haven assets. The Commerce Department released inflation numbers for the month of February on March 29th, revealing a 0.2% inflation figure for February, following a 0.2% figure in January. These figures are close to the 2% annual target the Federal Reserve set. Overall, the CPI increased by 2.2% YOY through February, compared with 2.1 percent in January. These figures exclude prices of what economists deem “volatile” categories, such as food and energy prices.
James Powell, the new Fed Chairman, was quoted as saying “In coming months, as those earlier declines drop out of the calculation, inflation should move up closer to 2% and stabilize around that level over the medium term.” If inflation figures are higher than expected, investors can expect more aggressive interest rates hikes from the federal reserve to avoid the economy from overheating. Should targets be met, the officials of the Federal Reserve have stated a three-quarter-point hike in interest rates this year, with the first one expectedly occurring during the first week of April. That idea has quelled the stock market, as early data on wages has created concerns about more aggressive rate hikes. Worries do remain about the implementation of tariffs proposed by the White House potentially increasing inflation figures in the short term. Keith Knutsson of Integrale Advisors commented, “While there remains some uncertainty for the rest of year, investors can expect a 25 basis points hike in interest rates in the coming month, rather than a more aggressive 50+ basis points. “ |
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October 2018
CategoriesAll Investing Keith Knutsson Real Estate Real Estate Investing |