Tag Archive for: cre asset classes

ULI, PwC Identify Top Markets To Watch In 2022 As Real Estate Investment Powers Up

Businessman looking through binoculars

Change is a major theme in this year’s Emerging Trends in Real Estate, an annual report by the Urban Land Institute and PricewaterhouseCoopers LLP, heading into 2022.

Housing affordability, soaring construction costs, climate change, proptech and the lasting impacts of remote versus in-office work are, unsurprisingly, some of the major topics and trends identified in this year’s installment. The report includes data, insights and survey responses from 1,700-plus real estate industry professionals.

While the economic recovery for the real estate industry has been better than expected since the pandemic, some adaptations and changes to the office, the way consumers shop and even how and where people live will be changed forever. The report’s survey found 47% of real estate professionals didn’t think changes implemented during the pandemic would revert back in 2022.

 “Long-term impacts from pandemic changes, such as the growing acceptance of work-from-home on the office market, are still unknown. But there’s a greater understanding that such shifts will impact commercial real estate,” said Anita Kramer, senior vice president of ULI’s Center for Real Estate Economics and Capital Markets. “A big lesson has been how things don’t have to change completely to have impact,” Kramer continued. “In the office sector, it’s not that everybody has to be working from home for changes to occur. The office sector is not dead but there will be a bit of a shift within it.”

She said when a fuller picture of how work-from-home will affect office emerges, that’ll prompt further questions: What happens to downtown businesses that rely on lunchtime crowds during the week, or older office buildings and retail centers that may be obsolete in a post-pandemic world?

Real estate investors’ capital war chests have been bolstered this year, but a disproportionate amount of money is flowing into a few sectors.

Tom Errath, managing director and head of research at Chicago-based Harrison Street Real Estate Capital LLC, said during a real estate economic forecast panel at ULI’s fall meeting this week that investors — some fairly new to real estate — are more recently wanting to understand alternative asset classes, which Harrison Street specializes in.

“We are seeing great interest from not only domestic capital but foreign capital,” Errath said. “These asset classes we focus on exist in other countries but they’re not as well developed there. If you want to access them in a meaningful way and take advantage of the transparency and liquidity that exists here, you have to be the in United States.”

Ben Breslau, Americas chief research officer at Jones Lang Lasalle Inc., also said foreign capital has been constrained during the pandemic because of travel restrictions and the inability to tour assets or markets. Once those restrictions lift, he said even more international capital will likely flow in to U.S. real estate.

Ken Rosen, chairman of Rosen Consulting Group of Berkeley, California, also said investors want to pile into the same few sectors. Disproportionately, industrial, multifamily and more niche sectors like life sciences are seeing the greatest competition from capital. The success of those sectors and more broad real estate fundamentals set the stage for more capital flowing in to commercial real estate in 2022.

But what about more traditional asset classes that have become less certain since Covid-19?

“Office remains a bifurcated sector,” said Breslau. “The flight-to-quality theme touted by many in the office space applies to investors, too. It’s not a rising tide lifting all boats but the best office space is seeing bidding wars from tenants. We have a lot of clients and investors who are getting incredibly frustrated, trying to deploy everything in two-and-a-half asset classes,” he continued, referring to industrial, apartments and alternative sectors.”That could propel savvy investors to find opportunities within sectors like office.”

“Properties are available to acquire now but investors may have to have more courage to buy what he called the more contrarian stuff,” Rosen said.

The ULI and PwC survey found most respondents felt there will be a year-over-year increase in availability of capital from lending sources, especially non-bank lending sources, in 2022 as compared to 2021. Sixty percent said they felt equity capital for real estate investing would be oversupplied in 2022.

Perhaps underscoring the continued optimism of the commercial real estate industry, 89% said they were confident about making long-term strategic real estate decisions in today’s environment, with 45% “strongly” agreeing with that statement.

ULI and PwC also identified several markets to watch in 2022.

“The scoring criteria is based on survey respondents’ scores on a city’s investment and development prospects, and other opportunities, said Kramer. “Smaller Sun Belt cities like Nashville, Tennessee, and Raleigh, North Carolina, are identified as supernova cities because of real estate fundamentals, in addition to having walkable downtowns and other factors.”

 

Source: SFBJ

 

This Asset Class Posted The Largest Price Growth In 2021

American dollars grow from the ground

In a surprising twist, suburban office achieved the greatest price growth at 14.8% of all CRE asset classes over the last year, besting investor favorites multifamily and industrial.

John Chang of Marcus & Millichap notes that the price growth in the sector reflects three factors: “a pricing bounce, a disproportionate share of well-leased properties in the sales data, and some investor speculation.”

Unlike the price gains notched in multifamily and industrial, suburban office appreciation is not well supported by rent growth, which was only up by 0.6% or vacancy rate change.

“Part of the gain is an anomaly,” Chang says. “Suburban office prices dipped last year in the early stages of the pandemic, so part of the gains are the property types simply recovering losses. Second, the sales market has been dominated by well-leased properties—high-quality tenants with long-term leases in place. The sales composition is a bit different and there were fewer weaker assets in the deal mix that would normally drag prices down.”

Chang also says investors are taking note of the widely-held belief that to facilitate employees’ return to the office, companies will have to open locations closer to people’s homes.

“A lot of workers, especially millennials relocated to the suburbs because of the pandemic, and a new trend is forming. Investors are positioning ahead of that curve buying low rise suburban buildings,” Chang says. “Investors are betting on history repeating itself. A significant portion of suburban office stock was built in the 80s when baby boomers migrated there. It looks like millennials are in the process of making that same move.”

The second fastest price growth, according to data from Real Capital Analytics, was in apartment properties, which came in at a 14.7% increase. These values are supported by a 90 basis point vacancy reduction through Q2, Chang says.  And again, investors have millennials to thank.

“Investors are pursuing multifamily properties because of demographics,” Chang says. “The aging millennials are now entering their thirties en masse, which is driving household formation up aggressively. Basically, there are so many millennials trying to move out on their own that there are simply not enough housing units to meet the demand. That trend is expected to run five years of longer, supporting the underlying thesis for multifamily investment.”

Industrial came in third, with price gains of 13.6% over the last year. That reflects average rent growth of 5.9% over the last year and a 30 basis point vacancy drop to 5% nationally, as well as cap rate compression of about 20 bps.

“Industrial properties have drawn increased investor attention over the last couple of years as e-commerce thrived during the pandemic,” Chang says. “The supply chain issues of recent months have also brought forth the importance of industrial property as businesses are stockpiling increased inventories to mitigate shipping and delivery risk. Industrial real estate has one of the strongest investment outlooks like investors penciling in aggressive rent gains into their valuation models.”

 

Source: GlobeSt

Property Prices Are Now Only 1% Below Pre-Pandemic Levels

Skyscraper Buildings Made From Dollar Banknotes

The Green Street Commercial Property Price Index increased by 4.4% last month, with prices of every asset type included in Green Street’s index increasing.

The index is now a mere 1% below pre-pandemic levels.

“Top lines are improving, cap rates are declining, and property prices are quickly recovering lost ground,” said Peter Rothemund, managing director at Green Street. “In some cases, like self-storage, industrial, and manufactured home parks, prices are hitting new highs—and are now 15-25% higher than pre-COVID marks.”

Buyers and sellers have been in a standoff over pricing since the pandemic began, and rising prices suggest that buyers are now more willing to negotiate on price.

“While some discounting has occurred in unique situations, valuations of most asset types have largely held steady or surpassed pre-health crisis levels as strong buyer interest has aligned with limited for-sale inventory,” Marcus & Millichap notes in a recent report on the phenomenon. “This dynamic has also led to cap rate compression among sought after assets.”

Pricing may also be moving because of higher transaction volume, which helps with price discovery. Commercial real estate transaction volume is expected to recover relatively quickly through 2023, to $590 billion versus $500 billion in 2021, according to the Urban Land Institute.

 

Source: GlobeSt.

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Industrial Investors Look For Bigger Returns With Class B and C Product

10349421 - hand of businessman holding dollars

Pricing and cap rates for Class A industrial product are expected to stabilize for the remainder of this year, according to a new report from Cushman & Wakefield—though trophy properties in the Inland Empire of Southern California, New Jersey, South Florida, Seattle, and Dallas will reap the most aggressive overall rates.

Spring 2021 data from C&W shows that overall capitalization rates range widely by asset class, with a nearly 90 basis point difference between Class A and B industrial product and a 235 bps difference between Class A and C industrial facilities. And overall rates for Class C properties are clocking in 143 bps higher than their Class B counterparts.

Average cap rates for Class A assets ranged from between 3.25 and 5.5% in spring 2021 and declined by 33 basis points year over year, while Class B went down by 58 and Class C assets declined by 89 bps since last spring. And while demand for Class A product in core US cities has been strong, over the past five years rates began to stabilize.

“Little if any additional compression is expected for the remainder of 2021 and into 2022, with investors closely monitoring interest rates and 10- year Treasury yield rates,” the report states.

Cap rates for Class B and C product are logging the largest decreases as investors target more of the former to generate higher yields and returns from higher-priced Class A assets. The average for Class B product this spring fell between 4 and 7%, while the average cap rates for Class C assets ranged between 5 and 9%.

“Due to the lack of available and higher priced Class A product, investors are now targeting Class B and, in some cases, Class C product, seeking higher yields/returns—especially from those assets located near populated urban areas,” the report states. “Product close to urban areas has become the driver in order to reduce shipping and, more importantly, delivery times.”

 

 

Source: GlobeSt