KPMG Report Shows Capital Spending on the Rise

KPMG's 2014 Commercial Real Estate Outlook Survey confirmed that commercial real estate executives are ready to develop new properties and invest their capital in secondary and tertiary markets to generate returns.
Phil Marra

KPMG has released its 2014 Commercial Real Estate Outlook Survey, and findings show that commercial real estate executives are ready to develop new properties and invest their capital in secondary and tertiary markets to generate returns.

Additionally, of the 100 senior commercial real estate executives surveyed for the report, 68 percent expect to increase capital spending in 2014, up from 60 percent in 2013.

“The thing that jumped out the most is that 80 percent of respondents expect substantial investment by foreign investors into the U.S., and we are clearly seeing that,” Phil Marra, KPMG’s national real estate funds leader, told Commercial Property Executive. “We have always had a large constituent of Canadians and Europeans, and now China and some of the other Asian markets are really dominating some of the activity going on here in the U.S.”

That’s especially true in New York, where numerous buildings are being grabbed by foreign investors.

Another telling result of the survey is that while people would like to buy Class A assets, the prices have increased so much that many are now looking at secondary markets and more value-add opportunities to generate returns to meet their fund requirements.

According to the report, 44 percent of executives said their company is finding quality investment properties in the marketplace, but not at prices that deliver sufficient returns. “There is more of a focus on these secondary markets and these B&C assets,” Marra said.

Thoughts on regions for the best opportunities were mixed, as the numbers came in with the Southeast at 48 percent, up from 28 percent in 2013; the Southwest at 33 percent, down from 45 percent in 2013; the Midwest at 31 percent, up from 16 percent in 2013; the Northeast at 30 percent, down from 36 percent in 2013; and the Northwest at 16 percent, down from 20 percent.

“I still think there’s an enormous amount of money going toward the energy sector in the Southwest, and a lot of that happened in the last 24 months,” Marra said. “Those who are looking for value and for distress are looking for other markets, and because of price run-up on Southwest cities, I think people are now looking toward the Southeast.”

According to Marra, investors are showing renewed interest in the Southeast given the manufacturing boom underway in the region and the expansion of the Panama Canal, which will bring dramatic changes to ports, cities, distribution centers, manufacturers and transportation hubs along the coast.

“Clearly, we are seeing the Southeast as an area to invest because there are some very good markets bouncing back,” he said. “Just look at the whole South Florida area—no one expected that to return as quickly as it did. We’re seeing development in Miami again and a lot of activity in the Carolinas.”

The survey shows that the multi-family sector is still the clear favorite among real estate executives. When asked how much development will commence in the U.S. in 2015, multi-family was identified as the top sector, with 53 percent of respondents expecting a “significant amount” to launch, up from 43 percent in last year’s survey.