Market Data

Brokers Predict Continued Multifamily and Industrial Investment

An experienced investment broker's perspective may be the most accurate and reliable measure of market trends that is available today. Of all the parties involved in investment transactions, only brokers have the broad perspective derived from multiple direct experiences and the need to focus on discipline-specific research. Their unique mission is to constantly grow their store of transaction-based knowledge regarding real estate investment and related economic trends for clients' benefit.

In this light, a survey of investment broker perspectives is useful in assessing national commercial real estate investment trends. Thus, a brief impressionistic survey recently was sent to a cross section of investment specialists nationwide. The survey asked brokers about their observations from the past year and their predictions for this year. Although the responses are based on anecdotal evidence from a group of real estate professionals who are more optimistic and forward-looking than the average population, the information gleaned is insightful and offers a good view of the investment market from the trenches.

Private vs. Institutional Investors

To establish a benchmark, the survey asked participants to identify the current most-active investor type in their respective markets. The overwhelming majority noted that private capital is more active than institutional. The reasons cited are similar for all regions: low interest rates, fear of fallout from the stock market's decline, and an increase in Internal Revenue Code Section 1031 tax-deferred exchanges. Brokers also citied the absence of large, high-quality offerings, particularly on the coasts, as another reason for the shift away from institutional buying.

Interestingly, Midwest brokers mentioned institutional dominance most often, belying the notion that institutional interest mainly focuses on the coasts, where there is more high-end product in larger markets.

Overall, private capital appears more willing to seek out opportunities in the current economic environment, and institutional capital prefers to wait for exceptional opportunities, which have been scarce.

Similarly, by a wide margin respondents projected continued private-investor dominance through this year. However, a number of them predicted institutions will pick up the pace, mostly in secondary markets, and some noted that institutions are beginning to look at smaller deals. Several brokers foresee increased real-estate-owned activity this year, opening the door for parties that can either move quickly or structure creative financing for troubled assets.

Most Sought-After Property Types

ultifamily and industrial are the most popular properties across the board, according to respondents. They cited office and retail only occasionally as the most sought-after product type, showing no particular geographic trend. Stability and quality of available product are the chief reasons for multifamily's continued dominance. However, both sectors seem to be riding parallel waves of popularity held in place by sheer momentum from transaction velocity and continued perceptions of limited downside, even during troubled times.

Looking to the future, most brokers see precisely the same trend for this year. Multifamily and industrial lead the preferred property types, with a few brokers predicting gains in office, especially in historically hot office markets such as Washington, D.C., Chicago, and Los Angeles. Interest in retail is expected to follow the path of continued residential development. One broker noted the growing popularity of land speculation strategies in the western states.

One astute observer noted that as the economy recovers, each community will experience increased sales activity in the property type that typically has dominated its market. That is, demand is expected to grow according to the size and type of each community's employment base.

Additionally, investors will revert to the types of investment they best understand and those that have worked for them in the past, both geographically and by product type. Most respondents agreed that much of the capital currently in the market will remain concentrated in the same property types and submarkets this year.

Capitalization Rates

Any discourse on commercial investment real estate, especially when engaging broker input, must include speculation on capitalization rates. A slight majority of respondents (48 percent) expect increasing office cap rates, and 45 percent foresee decreasing multifamily cap rates. Regarding industrial and retail, there was no consensus on the direction of cap rate movement.

One factor influencing future cap rates and investor interest is the expected magnitude of new development in the coming year. The majority of respondents see little change in the direction of new development for any product type, with the exception of the office market. Nearly 60 percent of respondents expect a downturn in new office development. In general, Midwest brokers are the least bullish on the likelihood of new product of any type coming online. Only brokers in Washington, D.C., and Las Vegas expect significant new product on the horizon.

Since job growth is a key factor relating to real estate sales activity and cap rate movement, the survey polled brokers on their expectations for job-growth rebound prospects in 2003. About 40 percent expect a rebound, and the types of industries expected to lead the way are technology (primarily in western states), defense, auto manufacturing, and, particularly in the Midwest, service and distribution.

Investment Activity Levels

As a final attempt to gauge the temperature of each market, respondents rated their perceptions of current overall investment activity in their respective markets on a scale of 1 (none) to 5 (frenzy). The vast majority of responses were between 2 and 3. Nearly 20 percent of the responses indicated frenzy or near-frenzy, especially regarding multifamily markets.

The greatest note of optimism is the anticipation of office market improvement from those looking mainly for opportunity buying. A few respondents differentiated activity levels among institutional buyers (generally 2) and private, opportunistic capital (generally 4). Finally, at least one respondent intimated that the world would be a better place if he had more product to sell.

T. Scott Pollom, CCIM

T. Scott Pollom, CCIM, is a principal and vice president in the Indianapolis office of Colliers Turley Martin Tucker. Contact him at (317) 639-0403 or tspollom@ccim.net.

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