CBRE report: Commercial real estate investors upbeat at start of 2018

A prolonged period of U.S. economic growth, as well as tax cuts and favorable regulatory changes, means that commercial real estate investors are more positive going into 2018 than they were at the start of last year, according to the CBRE Americas Investor Intentions Survey 2018.

The 2018 survey results reveal that the largest share (45 percent) of investors plan to increase their level of acquisitions in the Americas compared with last year. This pick-up in investor appetite marks a reversal from the downward or flat trend recorded in the prior two surveys. In total, 88 percent of investors plan to either maintain or increase spending in 2018 — up from 83 percent in 2017. Just 12 percent of investors plan to reduce their purchases in 2018, lower than the 17 percent in 2017. 

Investors see a “global economic shock” that undermines occupier demand (30 percent) as the greatest potential threat in 2018, slightly more than last year (22 percent). In contrast, investors are less worried about interest rates rising more quickly than expected this year (16 percent in 2018 versus 21 percent in 2017).

“Despite the possibility of escalating interest rates, the vast majority of investors intend to acquire assets in the Americas in 2018. 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,” said Brian McAuliffe, president of institutional properties and capital markets at CBRE. 

“Investors anticipate that the occupier trends with the greatest impact on real estate investments are last-mile logistics, flexible space, and less reliance on traditional office and retail. Investors are assessing the risk of high proportions of coworking space within a property on its long-term liquidity and residual value. Sustainability continues to factor into decision-making but is not a top priority for investors,” said McAuliffe.

U.S. gateway cities continue to command considerable interest. Los Angeles/Southern California is the top-ranked metro for property purchases, followed by Dallas/Fort Worth and New York City. As investors maintain their pursuit of good secondary assets, large upward shifts brought Nashville, Tennessee; Portland, Oregon; and Tampa/St. Petersburg, Florida ,into the top 10. 

Among the five different asset strategies — core, good secondary, value-add, opportunistic and distressed — value-add remains the preferred strategy (34 percent), but is down from 2017’s level (41 percent). Investor appetite for good secondary assets increased for the fourth consecutive year, as the supply of core assets diminishes and investors broaden their search for yield. Institutional investors — comprising sovereign wealth funds, insurance companies and pension funds — are more interested in core assets than are other types of investors, with 33 percent indicating core as their preferred strategy versus 20 percent of overall investors. 

“Given the declining return environment, it is no surprise that investors are racing to find the next Seattle by increasing their focus on the higher-yield potential of high-growth secondary markets,” said Spencer Levy, head of research, Americas, at CBRE. Investors are also moving further out on the risk spectrum to look for more opportunistic equity deals. 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 NOI growth and additional cap rate compression even in a rising interest rate environment.” 

Industrial is increasingly the preferred property type, cited by 50 percent of investors as the most attractive for investment in 2018, up from 38 percent in 2017. Multifamily (20 percent) and office (14 percent) are the next attractive property types, though their shares decreased from last year. Despite competition from e-commerce, the retail sector improved modestly from last year, attracting 10 percent of investors compared to 8 percent in 2017. 

Investor interest in “alternatives” strengthened significantly across most sectors. Real estate debt (37 percent) is the No. 1 alternative currently held by most investors and will be targeted most actively this year. Student housing, senior housing and healthcare are the next most common alternatives, each held by roughly 20 percent of investors.

The breakdown of anticipated capital deployment amounts is roughly comparable to 2017, although expectations for larger purchases in the $2 billion to $5 billion range are noticeably higher (14 percent in 2018 versus 9 percent in 2017). Institutional investors have different expectations than the average investor, with half intending to deploy more than $1 billion of capital this year and one-third intending to deploy more than $2 billion (compared to 28 percent and 18 percent, respectively, for other investor types).