JLL: ‘Moderating’ Volatility Increases Optimism Heading Into 2017

Financial markets remained unfazed in the third quarter despite June’s Brexit vote, reported JLL, Chicago.

“As investors attempted to come to terms with a muted reaction to Brexit, limited volatility continued to be the norm, with recurrent concerns regarding global monetary policy, OPEC, the Federal Open Market Committee rate decision and the U.S. election reemerging in the [third] quarter’s latter half,” the JLL Investment Outlook report said. 

But despite some “bumpiness” brought by the above events, capital market volatility remained muted–especially compared to the prior 12 months, JLL said. In fact, the moderated pace of recent volatility resembled spring 2015, when investors showed cautious optimism. 

“With strong, sustained liquidity in commercial real estate debt and equity markets, this ‘resetting’ of investor sentiment positions the markets well for stable growth heading into 2017,” JLL said.

The real estate services company said while investor sentiment is stabilizing and volume declines are moderating, “selectivity remains the norm across investor types, sectors and markets with an increased focus on downside risk mitigation and cycle assurance.” This affects liquidity for higher-risk submarkets and higher-priced core opportunities in some markets, JLL said. 

Asset pricing bears scrutiny as the calendar moves into 2017–especially in historically less-liquid market segments, JLL said. “[But] as long as sector fundamentals remain strong, we expect any near-term softening of cap rates to remain subdued.” 

Liquidity remains strong across debt and equity markets despite declining fundraising, JLL reported. “This is due in part to the amount of ‘dry powder’ sitting on the sidelines,” the report said. Dry powder–cash available for investment–remains at a record $239 billion globally with 57 percent focused on North America, the report said. This represents the highest proportion focused on North America since 2004, JLL said. “Looking ahead, as investors adopt latter-cycle strategies, debt fundraising is expected to remain strong, filling the financing gap at lower-risk positions in the capital stack,” in part due to regulatory pressures on traditional lenders, the report said.