Commercial real estate investor sentiment remains optimistic, quelling fears that effects from a maturing late stage cycle, rising rates and considerable pullback from Chinese capital would significantly dampen market performance in 2019.
Two-thirds of investors described the market as being somewhere in the “middle—not quite a boom or bust,” according to a report released by research firm Real Capital Markets.
Significant opportunities for growth exist in both primary and secondary markets but will likely require more work to identify, underwrite and close, the report found.
Underwriting will continue to move towards a more conservative approach due to factors such as rising rates, the maturity of the cycle, the pullback in Chinese capital.
“For the past decade, we’ve experienced unprecedented levels of investment activity where each year established another new record. With words like ‘plateau’ and ‘flattening’ now entering the lexicon, it’s important to note how far the market has come and that in these good times, plateaus are part of a healthy cycle,” said Tina Lichen, COO of Real Capital Markets.
Rising rates impact commercial real estate investor sentiment
While rising interest rates are playing a bigger role in commercial real estate investment, rates are not likely to change buyers’ market positions — at least, not this year.
“There is a lot of noise and over-exaggeration regarding market conditions. The volatility of the stock market creates greater opportunity for real estate because of the stability this alternative investment provides. As a broker or an investor, it’s the perfect storm,” said Kevin Mansour, managing partner of The Mansour Group, a division of Marcus & Millichap. He remains very optimistic about 2019, especially for investors looking to acquire properties up to $20 million.
The survey found that multifamily remains the preferred asset class among 35% of investors, with industrial as a close second (28%) due to a stable outlook driven primarily by e-commerce growth. Niche-oriented assets such as data centers, net lease investments and specialty office also remain attractive, while retail continues to lag.
Higher rents have continued to propel the multifamily sector, with significant foreign and domestic capital waiting to be deployed in this sector.
However, experts express concerns about the future outlook as upstarts of new construction have waned, leaving investors wondering whether ample business and corporate expansion will take place to boost the sector in the coming year.
Multifamily investors are also closely watching the continued increase in rents.
“Rents now represent a higher percentage of gross income than ever before. While this is good for the landlord, it’s not good for the consumer—at either end of the spectrum. At some point something has to give,” said Wayne Vandenburg, chairman and co-CEO at TVO Capital Management, which owns and manages multifamily assets in the U.S.
Investors suggested that while 2019 may be a status quo year for investing, 2020 — an election year — may see things slow until the results and a clearer direction are known.