Investor Sentiment Slipping

Commercial real estate investors appear to be growing more conservative as the real estate cycle lengthens.

Marcus & Millichap and National Real Estate Investor magazine’s First-Half 2019 Commercial Real Estate Investment Outlook said investor sentiment slipped from 150 in second-half 2018 to 147 in the first half of this year. Investor sentiment hit a cyclical peak of 179 in 2014 after falling to 91 in 2009, the report said.

Marcus & Millichap Senior Vice President and Director of Research Services John Chang said the dip in sentiment stemmed likely from interest rate sensitivity and the current cycle’s extended length. But he noted the index remains elevated. “I think people generally feel good about where things are going over the next year to 18 months, but looking beyond that timeline shows a little bit more concern about the economy and investors are taking a slightly more cautious approach as they underwrite investments,” he told the magazine. 

Seyfarth Shaw, Chicago, said the 140 commercial real estate executives it surveyed cited rising interest rates and the end of the current growth cycle as their main concerns.

“Survey respondents are clearly indicating the industry’s general sentiment that all good things must come to an end,” Seyfarth Shaw said. “The end of the current growth cycle, a new concern for a potential recession and a continued fear of rising interest rates round out the top three concerns.”

The top three reported fears could signal a slowdown in the market, Seyfarth Shaw said. Meanwhile, commercial real estate supply and demand issues fell out of the top three concerns this year to fifth place behind rising cap rates.

Nearly one-third of Seyfarth Shaw survey respondents indicated they plan to take advantage of the federal Opportunity Zone program either as an investor or sponsor. Of that group, nearly one-third of real estate executives said they are investing in Opportunity Zones as a new source of investment capital and one-quarter plan to use the program as a way to defer current taxable gains.

CRE executives ranked political risk including increased investigations and possible impeachment and stock market volatility near the bottom of their list of concerns, Seyfarth Shaw said.