Avison Young: Capital Continues to Flow into U.S. CRE

Investor appetite for U.S. commercial real estate remains relatively healthy as buyers look to increase CRE allocations in their ongoing quest for yield, reported Avison Young, Toronto. 

“Irrespective of the ongoing conversation around potential interest-rate hikes and new geopolitical factors such as the Brexit fallout, abundant capital continues to seek the stability and returns that the commercial real estate sector still offers,” said Avison Young Chair and CEO Mark Rose.

Avison Young’s Commercial Real Estate Investment Review report said asset scarcity is a factor in many markets.

“Historically low interest rates continue to fuel our industry,” Rose said. “Simply put, if there were some adverse event that caused interest rates to move up, we would have a correction–and that’s not necessarily a bad thing.”

But Rose said he does not expect to see rates move for a “considerable” time, “thus keeping commercial real estate top-of-mind with many investors, compared with alternative investments.”

The report said U.S. CRE volume moderated slightly in the first half compared with first-half 2015. But it observed a “tremendous amount” of capital chasing core, core-plus and opportunistic deals during the past year, “and demand for all asset types remained strong in the first half of 2016,” it said. It noted that widely available capital bolstered investment sales for nearly all U.S. markets. 

Avison Young U.S. Operations President Earl Webb said investors view the U.S. as a “safe haven” in an economically uncertain world. “Despite lower sales volume in some markets year-over-year, compressed cap rates and reported pricing indicated a sustained seller’s market with activity limited more by deal scarcity than investor demand,” he said. 

John Kevill, Principal and Managing Director with Avison Young, predicted continued global attention on the U.S. with “significant amounts of capital at work in major markets” that results in record pricing for top-tier assets. But with fewer assets currently on the market, investors looking to compete with institutional players are increasingly seeking mid-range deals in suburban markets supported by strong demographics, he said. 

“Pure cap-rate compression has stabilized and investors are going to look for growth from urbanization trends,” Kevill said. He noted that he anticipates that buyers seeking yield will increasingly focus on key assets in secondary markets.

Webb called the investment cycle “disconnected” in some ways from market fundamentals, though he noted that the U.S. continues to register positive indicators such as improved vacancy and rent growth across property types. “The ongoing favorable lending rates keep commercial real estate yields attractive, so that the U.S. investment sales market will continue to be robust and will support pricing expectations going into 2017,” he said.