Survey: Investors Shift Focus
Commercial real estate’s traditional focus on big cities and large employers is shifting as small businesses emerge as a growth engine and secondary markets move into view, reported the Urban Land Institute and PriceWaterhouseCoopers.
“It is clear that investors are looking beyond the traditional ‘big six’ U.S. markets [Boston, Chicago, Los Angeles, San Francisco, New York City and Washington, D.C.],” and favoring cities with better growth opportunities,” PWC and ULI said in Emerging Trends in Real Estate United States and Canada.
One interviewee, a broker with a large national office practice, called the current market “extremely competitive” for placing capital. That competition leads investors to drill down further into markets and submarkets, to work with smaller assets within larger markets and to focus on specialized property types, ULI/PWC said.
“There are also signs of a shift towards shorter-term horizons in the institutional space, a telling indication that active management is a growing trend following the Federal Reserve’s increase in interest rates in December and some concerns over the U.S. economy since then,” the report said.
A pension manager interviewed for the report said his firm now tries to avoid long-term investments. “Instead, we are looking for investments where the capital returns sooner,” he said. “The average life of investments should be three to five years.”
With external factors such as political instability and terrorism abroad influencing investor sentiment, 2016 could represent a “pivotal” year for U.S. real estate, the report said: “The concept of ‘path dependence’ suggests that the movement to secondary markets together with a greater attention to value-add assets and a still reasonable expectation of continuing U.S. economic expansion, advantages real estate over other investments in the U.S. and abroad.”
The report noted transaction volumes and pricing returned to pre-financial crisis levels during 2015, especially in large gateway markets, but said this does not represent prima facie evidence of a CRE bubble.
“Much is different from a decade ago, not least the reduction in the amount of leverage in the market, and both the real estate and banking industries have been assiduous in limiting that risk,” ULI/PWC said. “Nevertheless, it is difficult to be entirely sunny when 64 percent of the survey respondents describe the market as oversupplied with equity capital and 34 percent believe that equity underwriting standards will become less rigorous in 2016.”
But for 2016 and the rest of this decade, “it seems safe to say that the amassing of capital oriented to U.S. real estate will continue, but at a lesser pace than it has from 2012 to 2015,” the report said.
