How Will Commercial’s Capital Markets Fare in 2020?
January 22, 2020
A strong economy has translated into a booming past year for commercial real estate. Employment is high, commercial real estate loan delinquencies are down, and about $4.36 trillion of investments—the highest since the Great Recession—came in from commercial real estate lending entities, including REITs, pension funds, government-sponsored enterprises, and construction lending banks.
But how will 2020 compare? The CCIM Institute released a report in conjunction with the University of Alabama’s Center for Real Estate, “Vector Calibration: 2020 Capital Markets,” to examine the trends, drivers, and impact of capital sources flowing in and out of commercial real estate in the U.S. This includes REITs, private and public equity, and foreign investment.
“This year is especially important for [commercial] pros to understand where and how much investment activity to deploy to be successful,” says CCIM Institute’s Chief Economist K.C. Conway. Capital is flowing in from all directions in the commercial sector—domestic and foreign, debt, and equity, the report notes.
International buyers are being lured by the U.S.’s growing economy. “Commercial real estate in the U.S. was simply the place to find an attractive yield in 2019, which is likely to continue this year,” the report notes.
The industrial and multifamily sectors continue to be the ones which foreign investors are most likely to increase their exposure this year, the report notes. A 2019 report from the Association of Foreign Investment in Real Estate found that about 80% of investors want to increase their industrial exposure and 71% want to increase their multifamily exposure. Four of the top five global cities that they view as stable and secure real estate investment opportunities are in the U.S.—New York, Boston, Seattle, and San Francisco.
“The capital markets for commercial real estate in 2020 will remain strong, but it will take an added layer of sophistication on the part of the [commercial] practitioner to stand out in the crowd,” according to the report.
Some of the key issues for commercial real estate pros as they hunt for rich capital investments this year include:
Searching for viable assets among inventory shortages. “Competition to find assets and portfolios to list will intensify in 2020,” the report notes. “Some relief may come from completion of new construction, but the market is clustered primarily around two property types—multifamily and industrial….Opportunity exists in sourcing multifamily and industrial assets in key port, inland port, and logistics markets for industrial, value-add multifamily in cost-burdened [metropolitan statistical areas] along the East and West Coasts, and new construction in emerging secondary or tech hub MSAs such as Austin and San Antonio, Texas; Phoenix; Raleigh, N.C.; Nashville, Tenn.; and Tampa, Fla.”
Ensuring markets aren’t becoming overpriced. A seller’s market continues due to inventory shortages. As such, “having the investment and comprehensive market analysis skills to maximize net operating income—coupled with the ability to coax institutional investors out of their large-MSA bias that is driven by late-cycle liquidity anxiety—are essential tools for success in 2020,” according to the report.
Emphasizing environmental and social governance. This is becoming a growing issue for commercial investing. “Knowing how to factor in emerging local ordinances to enhance building efficiency in markets like New York and Washington, D.C., is critical to investment,” researchers note in the report. “Questions remain whether capital will be used to retrofit an office building instead of buying a new environmentally building.”
Download the full report at: CCIM.com/insights