CRE Executives Growing Cautious

After seven years of a strong bull market, some commercial real estate executives express caution about what lies ahead, reported law firm DLA Piper, New York. 

But 62 percent of CRE executives remain bullish about the sector over the next 12 months, the firm’s 2016 State of the Market Survey said. 

“Despite some concerns by industry leaders, the survey shows that U.S. commercial real estate is viewed by many as a source of strength–or at least a place of calm and long-term stability–amid tumultuous global markets,” said DLA Piper Global Real Estate practice Co-Chair Jay Epstien. “It will be telling to watch how the next six months unfold as real estate executives position themselves to address a whirlwind of opportunities, risks and disruptions facing the U.S. and global markets.”

The survey did not indicate a return to the outright pessimism seen during the Great Recession, DLA Piper noted. “Much of the concern appears to be driven by a combination of increased volatility in domestic and international stock markets and a feeling that prices might be at or near a peak,” the report said.

Of the 38 percent of respondents with a bearish 12-month outlook, nearly half attributed their stance to continued volatility in domestic and international stock markets.

Respondents noted some bright spots. Non-U.S. investors still see the U.S. as a safe haven, with 37 percent of respondents predicting that overseas investors will remain the most active equity investors in the U.S. Respondents predicted that Chinese investors will remain especially active, followed by investors from the Persian Gulf and Canada.

The survey also reported strong opportunities for non-gateway cities, with Seattle, Miami and Austin, Texas expected to perform best. “These markets are appealing to investors’ desires for income, coupled with high costs in gateway cities like New York and San Francisco [making those cities less desirable],” DLA Piper said.

For the third consecutive survey, respondents predicted that healthcare, multifamily and industrial real estate would be the most attractive asset classes in that order over the next 12 months. “This shows the continued strength in the healthcare industry, despite some recent signs of slowing in that sector,” DLA Piper said.

More than 70 percent of those surveyed expect that interest rates will increase slightly in the next 12 months. Of that group, 40 percent believed cap rates will also increase, compared with just 3 percent who said that in 2014.