The prospect of increased U.S. economic growth combined with less regulation, means that investor sentiment for commercial real estate investment is marginally more positive than last year, despite the potential for rising interest rates, according to the CBRE Americas Investor Intentions Survey 2017. Phoenix advanced to the Number 14 spot on this year’s list of survey respondents’ Best Metros for Investment, moving up from the Number 16 spot last year.
The 2017 survey results reveal that investors will remain actively engaged in real estate investment this year, with the majority (67 percent) intending to be net buyers (more acquisitions than dispositions). The percentage of net buyers has increased since 2015 (60 percent) and 2016 (65 percent). The vast majority of these investors (83 percent) intend to maintain or increase their purchasing activity in 2017.
Investors continue to be strongly interested in U.S. gateway markets. Los Angeles maintained its position as the most preferred metro for investment in 2017. The majority of investors are focused on real estate in the Americas and do not intend to make asset purchases in other regions of the world.
“Phoenix continued its recent trend of year-over-year growth with investment sales surpassing $9.2 billion in 2016—a slight increase from 2015 but a dramatic 50 percent increase from 2014 levels,” said Craig Henig, senior managing director and market leader for CBRE’s Southwest Region. “Multifamily was the strong investment sales leader in 2016, but Phoenix’s industrial and retail sectors also surpassed 2015 levels. Overall, our market fundamentals point toward strong investor interest in Phoenix in the years ahead.”
Slow global economic growth that could undermine occupier demand (22 percent) was identified as the greatest risk factor for real estate investors, just ahead of rising interest rates (21 percent). Concern that property is overpriced and “a bubble waiting to burst” (16 percent) is a distant third among the list of potential threats. Investors are relatively unconcerned about the potential effects of government policy measures.
“While investors expect to largely maintain last year’s investment activity levels, they also intend to retreat on the risk curve, becoming more conservative in strategy and risk appetite. This is counterbalanced by the search for yield,” said Brian McAuliffe, President, Institutional Properties, Capital Markets, CBRE.
“Echoing concerns raised at the beginning of 2015, investors perceive the global economy and rising interest rates as the greatest threats to property markets; they also continue to have concerns about asset pricing. If the anticipated level of inflow into commercial real estate materializes, this should to some extent counteract any pricing pressure resulting from a rise in interest rates,” Mr. McAuliffe added.
Reversing 2016 trends, the industrial sector (38 percent) is viewed as the most attractive asset class for investment in 2017, replacing multifamily (28 percent), with office (18 percent) in third position. Reflecting the headwinds in the retail sector from e-commerce competition, only 8 percent of investors cited retail as an attractive option in 2017, significantly lower than the 17 percent in 2016. Among “alternatives”, retirement housing was the only sector with an increase in interest, albeit small at 2 percent. Conversely, there were sharp drops in interest in real estate debt product and the leisure/entertainment sector.
Institutional investors (comprising sovereign wealth funds, insurance and pension funds) intend to be strong net buyers in 2017. More than half (54 percent) of all institutions plan to deploy more than $1 billion of capital in the Americas this year. Marking a departure from the wider pool of survey respondents, institutions are still primarily focused on core assets, closely followed by value-add. CBRE Research estimates that SWFs in particular are under-allocated to commercial real estate (with top 20 SWF’s allocating an estimated 3 percent of total assets to real estate), which accounts for expected higher levels of capital deployment.