Despite Recent ‘Rollercoaster,’ Real Estate Investors See Opportunities

While the past few weeks have been a “rollercoaster ride” for equity markets, one can still find good real estate investment opportunities, said Avison Young Chair and CEO Mark Rose.

“We believe that more capital is available to move into real estate debt and equity than at any other time,” Rose said. “The next wave of investment is not a matter of if or when, it’s just a matter of price.”

On the investment side, Rose noted prices are very high and have been for a few years. “Rising interest rates should be pushing cap rates up and prices down, but demand for real estate and longer-term views on a potential global recession are working to keep pricing within a narrow band,” he said. “The real estate industry has matured: buyers hold more equity and are generally not chasing deals.”

Rose said this situation has created a “tug-of-war” between the bid and the ask. “[This] sets up a modest but healthy pricing correction even as economic growth takes hold and interest rates rise globally,” he said.

The U.S. market provided fairly predictable returns last year despite some economic and geopolitical turbulence, Avison Young U.S. Operations President Earl Webb said. “The strong correlation between job growth and real estate value was again demonstrated in 2018 as the U.S. added more than two million jobs which, in turn, bolstered occupancy levels as well as consumer confidence. Vacancy rates across all property types remain low when compared with historically similar market cycles. Capital flows into commercial property in 2018 remained roughly equivalent to those of the prior year, and foreign investors continued to be significant investors across all U.S. property types, especially office and industrial.”

The multifamily and office sectors saw the most investment last year as foreign capital continued to flow into the U.S., Avison Young said. Canada was once again the top source of foreign capital, accounting for more than $40 billion of transactions and doubling its investment compared with 2017. France ($8.7 billion), Singapore ($6.3 billion), China ($5.6 billion) and Germany ($4.9 billion) rounded out the top five sources of foreign investment.

Looking ahead, Webb said to expect “modest” interest rate increases at a much slower pace than in 2018. “The U.S. economy is strong overall, and with continued job growth-related occupancy levels healthy, that strength should be maintained,” he said. But he warned the shortage of skilled labor will increase both operating costs and new construction costs.