CBRE: Most Investors Will Remain Net Buyers

The prospect of increased economic growth and less regulation drove investor sentiment for commercial real estate slightly higher despite potentially rising interest rates, reported CBRE, Los Angeles.

The CBRE Americas Investor Intentions Survey said that investors plan to remain “actively” engaged in real estate investment, with 67 percent intending to be net buyers–more acquisitions than dispositions. The percentage of net buyers grew since one year ago (65 percent) and since 2015 (60 percent). More than 80 percent intend to maintain or increase their purchasing activity.

The greatest risk factor for real estate investors remains slow global economic growth, which could undermine occupier demand, followed by rising interest rates, CBRE said. Concern about property overpricing/”a bubble waiting to burst” ranked a distant third among the list of potential threats. Investors are also relatively unconcerned about the potential effects of government policy measures.

“While investors expect to largely maintain last year’s investment activity levels, they also intend to retreat on the risk curve, becoming more conservative in strategy and risk appetite,” said CBRE Institutional Properties President Brian McAuliffe. “[But] this is counterbalanced by the search for yield.”

McAuliffe noted that investors also perceived the global economy and rising interest rates as the greatest threats to property markets two years ago in early 2015. “They also continue to have concerns about asset pricing,” he said. “If the anticipated level of inflow into commercial real estate materializes, this should to some extent counteract any pricing pressure resulting from a rise in interest rates.”

Investors remain “strongly” interested in U.S. gateway markets, CBRE reported. “Los Angeles maintained its position as the most preferred metro for investment, ahead of Dallas/Fort Worth and New York City,” the report said. “Washington, D.C. moved up the ranks from eighth to the fourth most preferred metro for investment in 2017. Atlanta, Seattle and Houston are also viewed as attractive markets for investment. The majority of investors are focused on real estate in the Americas and do not intend to make asset purchases in other regions of the world.”

CBRE noted that more than half of the investors surveyed search primarily for yield compared to both government bonds (30 percent) and other asset classes (21 percent). “This trend is even more pronounced among institutional investors, with 53 percent searching for yield,” the report said.

Among the five different asset types by strategy–prime/core, good secondary, value-add, opportunistic and distressed–value-add remains the preferred strategy (39 percent), similar to 2016, CBRE said. “Investors’ appetite for good secondary (non-core) assets increased significantly,” to second place, the report said. “This displaced core, which was ranked second-highest in 2016. The relatively diminished appetite for core product is attributed to a combination of low cap rates (which are not expected to get lower), weakening property fundamentals, and the search for higher yielding assets.”

Reversing last year’s trends, investors said they view the industrial sector as the most attractive asset class for investment, replacing multifamily (28 percent). Office ranked third with 18 percent. Reflecting the “headwinds” in the retail sector from growing e-commerce competition, only 8 percent of investors cited retail as an attractive option, CBRE said–significantly lower than las year’s 17 percent.

“U.S. industrial has emerged as a preferred asset class for institutional investors, both domestic and foreign,” said CBRE Vice Chairman and Managing Director of Industrial Properties Jack Fraker. “Global investors are targeting the sector for acquisitions and development, especially opportunities with scale. Investors realize that the fundamentals are robust with record-setting metrics for net absorption and rental rate growth, while new economic drivers such as e-commerce and the ‘Last Mile’ are creating even more growth in the sector.”

Fraker noted that institutional investors (sovereign wealth funds, insurance and pension funds) intend to be strong net buyers. More than half of all institutions plan to deploy more than $1 billion of capital in the Americas this year,” he said. In a switch from broader investment figures, institutions still primarily focus on core assets, closely followed by value-add, he noted.