Investors Look to Secondary Markets, Alternative Assets
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The search for yield this late in the cycle is enticing more commercial real estate investors into secondary markets and alternative assets, analysts said.
"[Real estate] investors are reducing risk and protecting income streams through diversification," said CBRE Global President of Capital Markets Chris Ludeman. "Pricing is at or near the previous peak for most asset types in prime locations, so investors are seeking yield in secondary markets and alternative asset types."
JLL, Chicago, said transaction activity grew 16.4 percent year-over-year in 2018. But the firm predicted economic growth in the U.S. and abroad will likely slow in 2019, which could lead to more "divergent" real estate market performance fundamentals. "Investor attention is increasingly shifting to liquid and secure markets and asset types," the JLL CRE Investment Trends report said. It noted the composition and behavior of cross-border buyers has shifted during the past 18 months as the U.S. has become a less attractive destination for investors hedging their currencies.
The CBRE Americas Investor Intentions Survey found investors' risk appetite is decreasing. The most common motivation investors cited for purchasing real estate was to secure a stable income stream (32 percent)--a much higher share than in past years--followed by expectations for capital growth (20 percent). Value-add remains the preferred asset strategy (37 percent), with interest in good secondary assets (33 percent) increasing for the fifth consecutive year.
CBRE found 40 percent of investors are pursuing one or more real estate alternatives including self-storage, senior housing and student housing--each favored by nearly 30 percent of investors.
Overall, CBRE found investors plan to remain active in commercial real estate markets; a full 98 percent of respondents said they intend to make acquisitions. But there has been a shift toward greater caution, with the share of investors planning to either maintain or increase spending in 2019 falling to 75 percent from 88 percent last year.
Industrial remains the preferred property type for investors, but multifamily, which fell from the top spot in 2017, regained considerable ground this year to closely follow in second place, CBRE said. Office remained the third most attractive property type for investors. Despite competition from e-commerce, the share of investors focused on the retail sector has held steady over the past three years.
Investors said they see a global economic downturn as the greatest potential threat, followed by rising interest rates, CBRE noted.