Situs RERC: Declining Investment Conditions for Many Property Types

More signs point to a possible commercial real estate downturn in the next 12 months or so, said Situs RERC, Houston.

“More subtypes showed a decline in investment conditions than an increase from fourth quarter 2018 to first quarter 2019,” the company’s Flash Report said. “Investors seem to be becoming more hesitant amid fears that the nearly record-long economic expansion will end soon.”

The survey findings come amid further signs of overall economic weakness. These signals include a projected reduction in gross domestic product growth in 2019 and fears of an inverted yield curve, which in the past has accurately predicted a recession within 18 months.

“After raising short-term interest rates four times in 2018, the Fed is taking a dovish stance, signaling that it won’t raise rates this year and is planning only one increase in 2020,” the report said. “The Fed also said it would end its balance sheet runoff by September.”

In addition, research firm Preqin, London, said private equity real estate investment activity could slow in the next year. One-third of the investors Preqin surveyed said they believe the sector will not do as well this year as it did last year.

Cap rate sentiment remains “mixed” among property types, but the overall CRE going-in cap rate increased only 10 basis points on average and the overall terminal rate remained unchanged between the fourth quarter and the first, Situs RERC said. “Apartments registered the lowest going-in cap rate of all property types for the third consecutive quarter, while also experiencing the lowest terminal cap rate in preliminary first quarter 2019 results, indicating continued investor enthusiasm in the sector,” the report said. “Average expense growth was steady from fourth quarter 2018 levels.”

Central business district office assets saw the largest investment condition decrease between late 2018 and early 2019. CBD office was the only subtype that moved from “above average” to “below average” investment conditions, Situs RERC said.

Regional malls again earned the lowest rating among all subtypes surveyed, driven by the continued trepidation in this sector.

The report noted industrial real estate continues to earn the highest investment condition rating among all property types by a healthy margin. Investment conditions improved in both industrial subtypes, research and development and flex properties.