US Market Watch: CRE confidence slips to seven-year low

Investment volumes in US CRE markets rose 16.4% to $482.6bn last year, according to JLL, who has forecast to a 10% fall in 2019 driven by a deteriorating outlook for the supply-side of capital markets which is expected to restrict liquidity.

DLA Piper’s survey, conducted in the five weeks to January 2 with respondents comprising 143 investors, developers, lenders, brokers, property and asset managers and other advisers, found that remaining optimism is becoming fragile.

For their outlook, the bears cited political and geopolitical uncertainty (30%), belief that an “inevitable” market correction was due (28%), anticipated rising interest rates (20%) and unsustainable cap rates (14%). Overall, 90% of all respondents said they expected an interest rate rise in the US this year. As the cost of capital increases, transactional volume would be expected to decrease – putting pressure on cap rates and sellers.

However, since the survey closed, Federal Reserve’s policy u-turn on future interest rate hikes to a more cautious “wait and see” position, may have assuaged near-term fears while US stock markets have rebounded in early 2019 somewhat. DLA Piper’s survey also showed concern over the impact of slowing US and global economies on commercial real estate. In the US, real GDP growth is expected to slow from 3.1 to 2.4% in 2019.16 Globally, economic growth is predicted to slow in key markets such as Europe and Japan.

On the flip side, 48% of the bulls remind us of the abundance of capital chasing real estate deals. According to JLL, dry powder is at an all-time high reaching $187bn at the end of last year.  Furthermore, 46% of bulls cite the enduring strength of the US economy.

Almost two-thirds of respondents (64%) believe private equity investors will be the most active equity investors in the US in 2019, followed by pension funds and endowment, which were ranked second with 52%. The top three most significant disruptors in real estate in 2019 were considered to be: coworking, which received 50%, e-commerce (47%) and the continued evolution of logistics and warehousing (40%).

DLA Piper explains:

“The rise of e-commerce and the disruption of retail have been prominent themes in CRE discussions. Two forces in particular are raising questions.

“First, a portion of foot traffic is being replaced by mobile commerce, which continues to grow and accounted for 40% of US retail sales in Q3 2018. This may be one reason that amid a potential wider industry slowdown, the demand for industrial warehousing space remains quite strong. Indeed, logistics and warehousing tied for first among respondents’ favored categories for investing.

“Second, the growth in ride-sharing and the prospect of autonomous vehicles suggests that much of the parking we rely on for foot traffic will no longer be necessary. One respondent predicted a 70% decline in parking, and another its eventual elimination. The opportunity to repurpose these spaces will prove an important element in the future of CRE.”

james.wallace@realassetmedia.com