CRE Investors Look Forward to Busy 2019 With Cautious Optimism

The latest survey on investor sentiment from NREI/Marcus & Millichap finds that investors expect an active year ahead but are taking a more conservative outlook.
John Chang, National Director of Research Services at Marcus & Millichap.
John Chang, Senior Vice President & Director of Research Services, Marcus & Millichap. Image courtesy of Marcus & Millichap

Marcus & Millichap’s outlook on real estate investment for the first half of 2019 and the latest NREI/Marcus & Millichap investor sentiment survey shows commercial real estate investors are expecting another active year but are still proceeding with caution. The outlook for improving property fundamentals is slightly more neutral than the investor sentiment recorded in the second half survey of 2018.

Forty percent of respondents expect property values to rise faster in the next 12 months, 38 percent were neutral and 22 percent don’t believe values will rise faster this year. Those sentiments are consistent with the broadly held perception by 70 percent of those surveyed that values are near a cyclical peak and will likely influence how they allocate investments this year.

“Although the index remains elevated, the modest reduction of Investor Sentiment reiterates caution sparked in the fourth quarter,” John Chang, senior vice president & director of research services at Marcus & Millichap, said in a prepared statement. “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,” Chang wrote in the report.

Political uncertainty, unforeseen shocks to the economy and rising interest rates were cited as top concerns by about half the respondents. The number of those expressing concerns about political unrest and geopolitical issues increased slightly from the last survey, from 44 percent to 51 percent, while respondents concerned about rising interest rates dropped from 67 percent late last year to 50 percent.

“Coming into 2019 the Fed softened its tone, implying that they are unlikely to be as aggressive on interest rate movement in the coming year. So, concerns about rising interest rates have abated,” David Shillington, president of Marcus & Millichap Capital Corp., stated in the report.

Also on the positive side, three out of four respondents think CRE offers favorable returns compared to other investment classes, up from 67 percent in the second half 2017 survey. Sixty percent, up from 56 percent in the last survey, say they have abundant capital to invest. More than half said they planned to increase their investments in the next 12 months versus only seven percent who said they expected to decrease investments.

Value-add opportunities appear to be popular with respondents, Chang noted. “That includes repositioning portfolios to diversify holdings and targeting assets with unique value-add propositions. Strategies like these have driven healthy transaction activity over the past four years.”

Sector breakdown

Industrial still has the most momentum and investor interest. The number of those believing it’s a good time to buy industrial property moved higher, with half of the investors who already own industrial thinking it’s a good time to buy more. One-third said it would be better to hold industrial properties and 17 percent said sell. Sixty-three percent said they expect the value of their industrial properties to increase and 33 percent expect values to stay the same. But the report noted those numbers are down from the previous survey.

“It is surprising that the expectation of value growth has decreased because we’re seeing great momentum across the entire sector that points to continued industrial expansion,” Alan Pontius, senior vice president & national director of specialty divisions, said in prepared remarks. “It is a reflection of caution resulting from such outstanding gains over the past few years.”

The survey found expectations for the office sector have been improving slowly each year. Half the respondents think it is a better time to hold, while 22 percent said it is better to buy and 28 percent said sell. About half the investors expect office property values to remain the same, with one-third anticipating an increase.

Multifamily investor views remained similar to the previous survey with 32 percent saying it is a better time to buy, 22 percent saying sell and 46 percent saying hold. The problem appears to be finding properties, according to John Sebree, first vice president & national director of the National Multi Housing Group.

“Investors have been casting their nets across a wider range of options over the last couple of years, driving increased activity into secondary and tertiary markets as well as a range of suburban locations in an effort to create value,” Sebree said in the report.

Apartment owners remain bullish compared with most other property types as a majority—56 percent—said they expect multifamily values to rise over the next 12 months. But even in this category, that number is down from 62 percent in the second half survey of 2018.

Investors are split on their views of the retail sector, with 24 percent of respondents saying it’s a better time to buy, 40 percent saying hold and 36 percent saying sell. However, the number of those responding buy is up from 18 percent. There is a bigger disparity in the numbers of all survey respondents with 49 percent saying it was a better time to sell retail properties.

“That disparity reflects the disconnect between the investors who are not active in this business versus those who own these assets and understand just how strong the sector is,” Scott Holmes, senior vice president & national director of retail, said in the report.

Hotel investors may be the most cautious of all. Investor appetite for hotels has been steadily declining since the 2010 survey when investor interest peaked at 70 percent who thought it was a good time to buy. The current survey found more than half—52 percent—of investors think it’s better now to hold onto hotel properties and only 16 percent said buy.

“The hotel sector is very sensitive to the economy. So if there’s an economic setback, hotel properties will feel it first. Naturally, investors are very sensitive to this and it drives more caution in the hotel sector,” Peter Nichols, vice president & national director of the National Hospitality Group, said in the report.