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Despite Gradual Cooling on Investor Sentiment, CRE Owners See Values Continuing to Rise

  • Posted on August 9th, 2017
  • at Uncategorized

Exclusive research results from the third quarter NREI / Marcus & Millichap Investor Sentiment Survey show a disconnect emerging in investor sentiment with uncertainty on one side and high confidence related to property fundamentals and performance on the other. The Q3 2017 Commercial Real Estate Investment Outlook also brings some good news to the market.

 

Overall, the results show a gradual cooling trend on investor sentiment. The investor sentiment index edged slightly lower to 150 as compared to 153 in the fourth quarter. Uncertainty related to the new Trump administration, modest tightening in capital markets, property price increases and the mature market cycle are some of the key reasons behind the decline in sentiment.

 

But the results also provide some positive news. Considering only the property currently in their real estate portfolios, most owners are optimistic that values will continue to increase over the next 12 months. Industrial investors remain confident, with 64 percent believing values will rise, followed by apartments at 58 percent, hotel at 51 percent, office at 41 percent and retail at 30 percent. The average expected appreciation for each property type is industrial at 5.1 percent, hotel at 3.9 percent, apartments at 3.8 percent, office at 1.6 percent and retail at 0.3 percent.

 

“Fundamentals have been exceptional when you look at vacancies, rent growth and still muted construction for most property types. So, there is a real difference in what is happening at the asset and performance level relative to investor expectations and the potential risks they are anticipating,” according to John Chang, first vice president of research services at Marcus & Millichap.

 

In addition, confidence remains high on the economic outlook, job growth, access to capital and real estate fundamentals. Nine out of 10 respondents predict that job growth will be the same or better in 2017 compared to 2016, while only one out of 10 expect a decline in job growth. Looking ahead, 81 percent anticipate that job growth will be the same or better in 2018 as compared to 2016 with 18 percent who think that job growth could be worse.

 

“The greatest impediment to job creation right now is the very low unemployment rate,” says Chang. The national unemployment rate has remained in the low to mid 4 percent range and there are nearly 6 million job openings, which is the highest volume on record. “So, we are moving into a situation where we could face labor shortages, which will slow down the pace of job creation,” he adds.

 

The majority of respondents (73 percent) continue to agree that commercial real estate offers favorable returns compared to other investment classes and they are still moving forward with plans to expand portfolios. Fifty nine percent plan to increase their commercial real estate investment in the next 12 months, while 34 percent expect investments to remain the same and 8 percent think that real estate holdings will decrease over the next year.

 

Among respondents who said their real estate investment is likely to increase, an average 22 percent increase is predicted. Consistent with the cooling in sentiment, those who do plan to increase holdings is down from 67 percent who held that view in the fourth quarter. Most respondents think it is generally a better time to hold assets. Among respondents who already own a particular property type, those who think it is still a good time to buy more include industrial at 47 percent; undeveloped land at 40 percent; and mixed-use at 39 percent. Those property types where it is considered a good time to sell include retail at 40 percent; hotel at 34 percent; and office at 30 percent.

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