Industry Survey Participants Expect Rush of Transaction Activity Ahead of Presidential Election
CARLSBAD, CALIF. — Commercial real estate investors, brokers and lenders are expecting a surge of activity in the first half of 2020, according to the 2020 RCM LightBox Investor Sentiment Report. Participants of the survey noted the intersection of strong market fundamentals, ample investor capital and the potential for increasing headwinds generated by a slowing economy, the impending presidential election and other factors.
The report is sponsored by RCM Lightbox, a commercial real estate online marketplace and database facilitating commercial real estate transactions. Incorporating views from more than 275 investors, brokers, lenders and economists, the report found that nearly 70 percent of participants believe 2020 investment activity will be the same or higher than in 2019. Almost 80 percent believe 2020 sale prices also will be the same or higher as well.
“In the first half of the year, capital will rush to put money to work ahead of the election and before the Fed changes its mind on interest rates,” says K.C. Conway, chief economist of the CCIM Institute and director of research and corporate engagement at the Alabama Center of Real Estate (ACRE). “The wind is at your back for the first six months.”
Presidential election will create a pause around mid-year
“The greatest concern we see for 2020 is U.S. political uncertainty,” says Jay Olshonsky, president and CEO of NAI Global. “What, if any effect, will the uncertainty have on job growth and on sales and revenues? Will buyers shut down until there is clarity and some predictability, thus creating a flatness in the market that translates to limited activity?”
Speaking specifically about the multifamily sector, Brian McAuliffe, president of capital markets for CBRE, is confident that diversified capital flows into multifamily will drive transactions, despite the possible uncertainty of the 2020 presidential election.
Over the long-term, McAuliffe says, “We don’t anticipate a significant change in activity, but we’ll see as we head through the first few quarters.”
Lenders are taking a more conservative look
“Lenders have become much more sophisticated about underwriting, taking a more granular approach to identifying risks. They want to avoid situations where they are taking back assets,” says Hugh Kelly, PhD, chair of the Curriculum Committee at Fordham University’s Real Estate Institute.
According to the report, lenders are:
• Examining LTV ratios more closely
• Looking at debt exposure more individually
• Evaluating property cash flow more carefully.
Sue Blumberg, senior vice president and managing director at NorthMarq says, “Loan-to-value ratios have never been more important. Lenders are looking very closely at tenant cash flows, debt exposure and when the loans are coming due.”
Investor strategies are shifting in 2020
Industry experts shared their perspectives around shifting strategies for investors in light of market threats and drivers for 2020.
“We’ve reached a point in this current cycle where optimism and discipline continue to prevail and drive investment activity, but not necessarily for everyone,” says Tina Lichens, chief operating officer of RCM LightBox. “Investors expressing a more cautionary tone aren’t completely pulling back, but instead are adapting their investment profile and looking at different markets and risk profiles.”
Throughout this extensive expansion cycle, investors, developers and lenders have been cited for their discipline. Today that level of discipline is being fine-tuned further. For instance, some investors are moving away from value-add opportunities to stabilized assets that produce healthy, predictable cash flow. Likewise, landlords are looking more closely at rent rolls and how to extend leases to ensure a high occupancy in three to five years.
“With the lateness in the cycle, a pool of prospective purchasers is increasingly considering stabilized assets as a practical, defensive move,” adds James Postweiler, Executive Managing Director, Newmark Knight Frank. “Buyers of stabilized assets don’t want a lot of rollover. They are are looking for healthy, predictable cash flow levels that will produce targeted internal rates of return (IRR) for investors.”
E-commerce will heighten activity in major markets
The industrial market has been dominated of late by large portfolio sales, driven by institutional investors looking to scale up quickly and gain a large foothold in this hot sector. According to Kasselman, the large portfolio buys by Blackstone and others are reshaping the investment market and are pushing smaller investors to seek yield in secondary markets.
“The key is looking in the markets that have a couple of million people in their MSA. Those people rely on the delivery of goods, just as they do in the larger markets,” he says. “And, they are of a size where retailers will incorporate them as part of their strategies for same- and/or next-day delivery.”
While there is considerable optimism about the commercial real estate market — because of capital available for investment and strong market fundamentals — various industry professionals believe that a “tap on the brakes” is imminent.
“If I had to put a word on the coming year in terms of the economy and the market, the word would be ‘deceleration,’” says Kelly. “We’ve enjoyed a very long run of expansion. At the very least we should be focusing on things slowing down in 2020.”
— Staff Reports
To download a copy of the 2020 RCM LightBox Investor Sentiment Report, click here.