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CRE Investors Have Their Wallets Out

February 5, 2018



CRE Investors Have Their Wallets Out

Whether or not the current year proves to be a boom period for the US economy, commercial real estate investors plan to acquire more. That’s the topline takeaway from Real Capital Markets’ Investor Sentiment Report, which finds that 76.7% of investors would characterize their strategy as buyers. “Investors across the country continue to see great opportunity and benefit in commercial real estate investing,” says Steve Shanahan, executive managing director with RCM. “Regardless of the product type or whether the strategy is core or value add, the focus is on finding assets that can deliver strong yields that outpace other investment options.” Looking more closely at the “buyer” majority, 41% of respondents characterized themselves as buyers while 35.3 percent classified their strategy as buying but trending toward hold. Further, nearly half (48.4%) of investors say their investment strategy has not changed in the last 12 months, while 16.5% said they are even more of a buyer now than they were a year ago. RCM notes that with so much capital on the sidelines, and with so many investors who want and need to deploy it, value add was ranked as the predominant investment approach going into 2018. “There is no question that value add is still in high demand,” the report quotes Brian McAuliffe, president of institutional properties for CBRE. “Some investors may have to expand their product parameters—price and location— in their search for yield.” Within the value add arena as well as more broadly, multifamily remains the preferred product type. However, industrial is not far behind, favored by 33% of respondents compared to 35% who rate multifamily highest. That being said, apartments may still maintain their edge, given the greater availability of product in the sector along with the predictability of yield and cash flow, RCM says. Yet the report quotes Noble Carpenter, Cushman & Wakefield’s Americas president, capital markets & investor services, on the performance dichotomy within multifamily: luxury gateway properties struggled in 2017, while class A product and suburban garden complexes fared considerably better. The continuing gap between buyer and seller expectations on pricing was seen as the most likely factor to influence investment decisions this year, cited by more than 60% of respondents. However, RCM notes that a significant number of participants also focused on the various economic factors that could have an influence on market activity in ‘18. More than half (53%) of the investors surveyed said an increase in interest rates would make no difference in their investment strategies. Conversely, though, almost one third said that increased rates would make them less inclined to buy. “A small increase wouldn’t be a big deal,” the report quotes Martin Pupil, president, US brokerage with Colliers International. “The catastrophe would be going from 4% to 8%.” David Scherer, a cofounder of Chicago-based Origin Investments, noted that the economy continues to be strong, inflation hasn’t yet reared its head and the government has just enacted the massive tax cut package. “It is plausible that will cause inflation, and interest rates could increase faster, which typically makes cap rates trend higher,” the report quotes Scherer as saying. “We don’t know what will happen, but we won’t stop investing.” (




IRR: Moderate, Steady Growth Predicted for Commercial Real Estate in 2018

The outlook for the year in commercial real estate is cautiously optimistic, as several signs of excess that cause market corrections begin to amass, according to the 2018 edition of Viewpoint, an annual commercial real estate trends report released by Integra Realty Resources (IRR). Annual job growth dropped from 2.3 percent in early 2015 to 1.4 percent in October 2017, while real weekly incomes rose only 0.4 percent for the 12 months ending in October 2017. Production and non-supervisory workers saw an even smaller rise of only 0.3 percent during this time. These levels were not enough to spur consumption significantly in 2017, with personal consumption expenditures (69.4 percent of GDP) in the third quarter up only 2.3 percent from the prior year. If the market continues in this direction, corrections may be imminent, IRR warns. “In the short term, we find the commercial property markets solidly in their ‘expansion phase’ in most areas of the country, but now is the time for real estate owners and investors to begin thinking about defense strategies,” says Hugh Kelly, veteran commercial real estate economist and contributor to the report. “However, it should be a less severe downside for the commercial real estate industry than the downturn in 2008 thanks to more disciplined buyers.” Even with a slower market, commercial property prices rose on average 8.4 percent, signifying more cautious selection rather than any withdrawal of capital in the commercial real estate investment marketplace.


The office sector saw another year of solid absorption in 2017, with the U.S. workplace continuing to see demand from finance, professional and business services, alongside start-ups utilizing co-working space. A decline in office transaction volume through the first three quarters of 2017 — which included an overall drop of 6 percent or $94.5 billion — is evidence of greater buyer discipline, according to the report. The country saw a shift in investor demand from downtown offices to suburban properties as central business districts are becoming fully priced. Heading into the new year, 48.4 percent of suburban markets were in expansion — the highest level since the financial crisis. The report suggests that, while all is currently well, future demand may be attenuated for office space. The year ahead faces the constraint of a 4.1 percent unemployment rate and an employment-to-population ratio of 60.1 percent — the highest since 2010. Offices may be vulnerable in the years to come if the finance and tech sectors face a down-cycle, making defensive planning a wise decision moving forward.


Industrial is cited as a “capital magnet,” driven by increasing levels of e-commerce and global trade. Entering 2018, the industrial property sector has outperformed all other property types with double-digit returns, high absorption rates, rising occupancy and rent growth. Through the first three quarters of 2017, industrial transactions totaled $51.8 billion, up 23 percent over the same period in 2016. The report also shows that 83 percent of national markets are in expansion mode, with four markets expecting 5 percent market rent growth: Cleveland; Hartford, Conn.; Kansas City, Mo.; and Seattle. As a sector, industrial seems to be in a mid-cycle stage rather than late-cycle, and appears to have the opportunity to sustain strong cyclical momentum through 2018 and beyond, IRR reports.


Trading velocity is slowing in the retail sector. Real Capital Analytics data for the first three quarters of 2017 tallied at $46.9 billion in shopping property transactions, down 19 percent from the same period in 2016. In contrast to office, the number of assets trading hands was down as well, declining 9 percent to 4,620 properties. Aggressive asset management versus portfolio growth is the key to success for retail investors, according to the report, as retailers continue to be disrupted by e-commerce alongside shifting demographics and consumer spending habits. The majority of markets in the Western United States are in an expansionary market cycle phase. The top markets ranked by year-over-year transaction growth rate are Las Vegas; Stamford, Conn.; Broward, Fla.; Austin, Texas; and Hartford, Conn. For 2018, 66 percent of national markets are considered ‘in balance’ and an additional 25 percent are within two years of becoming ‘in balance.’ On average, markets are expected to see a 2.2 percent increase in retail rents over the next 12 months, and 74 percent of markets should expect to see cap rates remain stable, according to the report.


IRR predicts a slow in the hospitality sector after an eight-year bull cycle. Fundamentals remain strong enough to forecast stability, but slow growth is expected during 2018. Hospitality transaction volume dropped 25 percent over the first three quarters of 2017 to $31 billion. Industrial consolidations are expected to continue, as brands believe that a larger system can lower reservation costs and expenses. IRR predicts that asset value growth will be seen in 75 percent of hotel markets during 2018, while cap rates will remain constant in 71 percent of markets and rents will grow at 3.3 percent.


Momentum is slowing in the multifamily sector, as displaced demand from the single-family housing sector has now been accommodated and the pace of employment growth is decelerating. Overall transaction volume from the fourth quarter of 2016 to the third quarter of 2017 was $150.6 billion — down year-over-year by 9.8 percent. The report shows that 91.9 percent of markets are in expansion phase, with a shift to hyper supply due to strong development volume seen in Baltimore; Washington, D.C.; and Atlanta. Integra predicts that market rents will increase on average by 2.45 percent, and 24 percent of markets are forecasting higher cap rates for the year ahead. (REBUSINESS ONLINE)