Take What the Market Offers

Our belief is that investment returns are significantly driven by macro factors such as inflation, economic growth, credit cycles, the level and direction of interest rates, equity multiples, and cap rates. We, at times, need to make minor adjustments to our strategies to ensure we are making the most of what the market offers.

Longer-Term GSA Leases May Increase Property Values

Longer-term leases tend to benefit both GSA tenants and property owners. A typical GSA tenancy is more than two decades long whereas an average lease is 10 years, with 5-year extension options being typical.  Structuring a longer-term lease that more closely matches GSA tenancy can result in cost savings through lower rents. Property owners, in turn, may experience higher property values due to more stable occupancy, potential reduced costs, and potential better financing terms. 

Higher Volatility, Lower Returns Likely in the 2018 Bond Market

Given the surprisingly solid bond market performance of 2017, what might fixed income investors expect in 2018? Unfortunately, lower returns. Despite favorable risk asset performance expected from strong earnings growth and ongoing demand, in our view investors should not expect to earn a return higher than the yield of the Bloomberg Barclays Aggregate Index, which was 2.71% at year end.  Instead, we believe investors are likely to experience higher volatility and lower returns this year versus what they enjoyed in 2017. 

Our Macro View

For several years, we have referred to the US economy as a “caterpillar” economy. Since the 2008 Great Recession, the economy has inched along, alternately accelerating and decelerating, as it continues to steadily gain ground. For 2018, we foresee another year of caterpillar-like growth.