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Investors in Buy Mode, Keen on Value-Add Opportunities, Concludes RCM Survey

A majority of respondents characterized themselves as value-add investors. In other words, they are looking for growth through renovation or repositioning properties to enhance value.

CARLSBAD, CALIF. — A majority of commercial real estate investors indicate that they are in a buying mode in 2018 and are particularly focused on properties in the value-add space, according to a survey conducted by Real Capital Markets (RCM).

The National Investor Sentiment Report and follow-up interviews were completed in early January by RCM, a Carlsbad-based online technology platform for buying and selling commercial real estate. RCM surveyed more than 250 investors active in all property types across the United States to gauge their investment strategies and outlook for the year ahead.

More than 75 percent of respondents classified their investment strategy as buy, or buy but trending toward hold, according to the survey.

“Investors across the country continue to see great opportunity and benefit in commercial real estate investing,” says Steve Shanahan, executive managing director of RCM. “Regardless of the product type or whether the strategy is core or value-add, the focus is on finding assets that can deliver strong yields that outpace other investment options.”

Of the respondents, a majority (58 percent) characterized themselves as value-add investors. In other words, they are looking for growth through renovation or repositioning properties to enhance value. These types of properties are in short supply, however, which means investors are finding it necessary to broaden their investment strategies, according to RCM.

“There is no question that value-add is still in high demand,” says Brian McAuliffe, president of institutional properties for CBRE in the firm’s California office. McAuliffe and other commercial real estate leaders were involved in RCM’s follow-up interviews to offer further insight on the market. “Some investors may have to expand their product parameters, price and location in their search for yield.”

Nearly one in five respondents (19 percent) is focused on opportunistic real estate transactions, the survey shows. Opportunistic investments are properties requiring significant renovation and/or redevelopment. Less than one in 10 respondents (9 percent) is concentrating on either core and core plus investments. Core investments are generally stabilized assets that carry the least amount of risk. Core plus assets are similar to core, but the primary difference is that a modest amount of leverage is utilized in the acquisition of the asset, according to RCM.

Industrial: ‘The New Retail’

The survey also asked respondents what asset types they currently find most attractive. Multifamily led the field, with 35 percent of respondents selecting it as the most attractive sector, but industrial was hot on its heels at 33 percent. Office, retail, hospitality and land assets ranked next in order of attractiveness.

Part of the surge in popularity of industrial assets can be attributed to the rise of e-commerce and the notion that industrial is the new retail.

“There are retailers who are replacing [shopping center] leases of $30 to $100 per square foot with $4 per square foot industrial space so they can offer same-day shipping,” says Noble Carpenter, president of capital markets and investors services for Cushman & Wakefield, Americas. “It’s that convergence that is keeping industrial white hot.”

McAuliffe of CBRE adds that investors’ preference for industrial/logistics facilities and multifamily product will remain until there is a recovery in the retail sector. As e-commerce grows further, he predicts the market will continue to see the returns on industrial product outperform most other property sectors.

Looking Ahead

While investors are acutely focused on making acquisitions, they suggest the discrepancy between bid and ask prices is the factor most likely to influence the level of activity in 2018, according to the survey.

“The expectations of what a property should sell for are not always being met and that leads to sellers making the decision on whether to take a lower price or refinance and hold, if they are able to do that,” says Jay Olshonsky, president of NAI Global.

Investors also warn that changing economic conditions could be a factor affecting investment levels in the year ahead.

Inflation hasn’t kicked in yet and the government just passed the massive tax cut package, points out David Scherer, co-founder of Chicago-based Origin Investments. “It is possible that will cause inflation, and interest rates could increase faster, which typically makes cap rates trend higher,” he adds. “We don’t know what will happen, but we won’t stop investing.”

Despite facing some possible headwinds, the commercial real estate industry is benefitting from strong tenant demand across property types and is buoyed by a strong economy, according to industry experts.

“We are very bullish about 2018,” says McAuliffe. “With abundant capital in the market, we believe it will be as good or better than last year.”

— Camren Skelton

 

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