Commercial Real Estate Investors See Cause for Optimism
Commercial real estate investors feel more optimistic now than a year ago, the CBRE Americas Investor Intentions Survey said.
The survey said “prolonged” economic growth as well as tax cuts and favorable regulatory changes are leading real estate investors to anticipate increased buying activity–the largest share of investors surveyed said they plan to increase their acquisitions compared with a year ago.
This increased investor appetite reverses a downward or flat trend recorded in the prior two annual surveys, CBRE said. In total, nearly 90 percent of investors surveyed said they plan to either maintain or increase their spending, up from 83 percent a year ago. Just 12 percent said they plan to reduce their purchases this year compared to last year.
“Despite the possibility of escalating interest rates, the vast majority of investors intend to acquire assets in the Americas in 2018,” said CBRE President of Institutional Properties and Capital Markets Brian McAuliffe. “Risk tolerance is expected to remain unchanged, but investors’ search for yield and asset diversification is pushing them toward value-add assets, secondary markets and ‘alternatives’ in 2018.”
CBRE said investors see a global economic shock that would undermines occupier demand as the greatest potential threat. In contrast, they worry less now than a year ago about interest rates rising more quickly than expected.
McAuliffe said trends with the greatest impact on real estate investments include last-mile logistics, flexible space and less reliance on traditional office and retail. “Investors are assessing the risk of high proportions of co-working space within a property on its long-term liquidity and residual value,” he said. “Sustainability [also] continues to factor into decision-making but is not a top priority for investors.”
U.S. gateway cities continue to command considerable interest among investors. Los Angeles/southern California ranked highest for property purchases, followed by Dallas/Ft. Worth and New York. But as investors maintain their pursuit of good secondary assets, large upward shifts brought Nashville, Tenn., Portland, Ore. and Tampa/St. Petersburg, Fla. into the top 10, the report said.
CBRE Americas Head of Research Spencer Levy saw “no surprise” that investors are increasing their focus on the higher yield potential of high-growth secondary markets given the declining return environment. “Investors are also moving further out on the risk spectrum to look for more opportunistic equity deals,” he said. “Markets like Tampa Bay, Nashville, Montreal and Portland all rose substantially in investor interest this year, not only because of superior current yields than the majors, but for the single most important factor of all: higher projected office-using job growth. Investing in markets with the fastest job growth can lead to greater net operating income growth and additional cap rate compression even in a rising interest rate environment.”
