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Stare out a street-side window for a few minutes and you don’t have to wait long to see a truck from FedEx, UPS, the U.S. Postal Service or some local delivery service scoot on by shuttling brown boxes to seemingly every address on the block.
Delivery of all kinds of goods has become ubiquitous and only keeps growing, especially with so many boutique firms offering subscriptions to regular-use products like razor blades, electric toothbrush heads, pet food, meal delivery kits and countless other items. And then, of course, there’s Amazon and it’s daily deluge.
Stare out a street-side window for a few minutes and you don’t have to wait long to see a truck from FedEx, UPS, the U.S. Postal Service or some local delivery service scoot on by shuttling brown boxes to seemingly every address on the block.
Delivery of all kinds of goods has become ubiquitous and only keeps growing, especially with so many boutique firms offering subscriptions to regular-use products like razor blades, electric toothbrush heads, pet food, meal delivery kits and countless other items. And then, of course, there’s Amazon and it’s daily deluge.
It’s this activity that’s helping drive the fortunes of the U.S. industrial real estate sector. And the findings in our fifth annual study of the sector show there’s little expectation for the tide to turn. Fundamentals in 2018 improved across the board. And while there was some weakening in the bullishness among our readers compared to last year’s study, the overall sentiment remains very optimistic.
The net lease investment sector is continuing to ride a wave of strong liquidity that is fueling robust transaction volume and steady cap rates and that momentum is likely to stay the course in the coming year., according to NREI’s latest exclusive research into the sector.
Despite an uptick in interest rates over the past year and a strong view that the commercial real estate market cycle is at its peak, a majority of respondents still see healthy flows of capital targeting net lease assets. Nearly two-thirds of respondents rated the availability of both equity and debt as the same or better than it was 12 months ago. That liquidity is supporting an active buying market. According to Real Capital Analytics, single tenant property sales (including office, industrial and retail properties) rose 11.4 percent in 2018 to $65.4 billion.
Traditionally, buyers have gravitated to net lease properties for the steady income, credit quality and low management responsibilities. That stability is even more attractive to investors who are shifting to more late cycle “defensive” investing strategies. “Most people think we are in the late stage of the cycle, but the cycle also could last for a while,” says Randy Blankstein, president of the Boulder Group. “It wouldn’t surprise us to see things similar to 2018 play out in 2019.”
Although it has not been the star of this extended commercial real estate cycle, the office sector has delivered its fair share of strong performance and solid returns. Occupancy rates and rents rose, cap rates fell and development has been kept in check.
But now, for the first time in the five years since NREI began its exclusive research gauging sentiment in the sector, cracks have begun to emerge. That’s not to say it’s time to worry. A majority or clear plurality of respondents for each question indicated a belief that fundamentals have more room to improve. Yet across the board, the sentiment has begun to turn.
The continued strength of commercial real estate as a sector, combined with the disciplined strategies of REIT management teams in recent years, has left publicly-traded REITs in a good position despite the overall maturity of the current cycle. There are few red flags about leverage, the quality of properties in REIT portfolios and investment activity, leading respondents to expect share price and total return growth for REITs for the balance of 2019.
Those are the findings of NREI’s fourth annual research survey exploring the state of publicly-traded REITs.
The current real estate cycle is stretching into its second decade—with no clear end in sight. While there have been hiccups in some segments (we’re looking at you, retail), multifamily has been a rock. And despite being the favored asset type of many classes of investors, driving cap rates ever lower, the sector’s fundamentals have held up. To modify a phrase from Arrested Development’s George Bluth, there’s always money in multifamily.
For six years we’ve been tracking sentiment in the sector as part of our NREI Research Series. In fact, the response to and success of our annual multifamily research reports is what led us to expand the effort into other property types and topics. In that time, sentiment among respondents for multifamily has always been bullish. Yet that enthusiasm has moderated some from year to year. The big takeaway in this year’s edition is that optimism has ticked back up after dipping some in 2018.
Categorizing it as a “midcycle adjustment” meant to bulwark against “downside risks,” Federal Reserve Chairman Jerome Powell announced the Federal Open Market Committee’s decision to cut the benchmark federal funds rate a quarter point to a range of 2.00 percent to 2.25 percent. It was the first interest rate reduction in the U.S. since December 2008—the height of the financial crisis, when the target rate was lowered to a range of 0.00 percent to 0.25 percent. The fed funds rate had been on a long, slow march upwards starting in December 2015, moving up nine times since then at a clip of a quarter point at a time.
That gradual rise had caused little more than a ripple in commercial real estate financing circles as the long recovery has largely proceeded unabated since the financial crisis and the Great Recession gutted the sector more than a decade ago.
And although there has been consensus for some time that this commercial real estate cycle is long past due for a dip, the move to reduce rates now comes before any serious issues have set in. That’s the context in which NREI conducted its latest survey on the state of commercial real estate financing. (The survey was completed shortly before the Fed officially cut rates, but many respondents indicated they were expecting such a move to occur.)
Stakeholders across the seniors housing sector have been keeping a careful eye on the robust construction pipeline that has been bringing new supply and increased competition to many metros across the country. Yet results from the sixth annual NREI/NIC seniors housing survey show a positive outlook over the coming year for sector performance and access to capital, along with predictions for a steady pace of transaction activity. A majority of respondents in the latest piece in the NREI Research Series believe the sector will continue to perform well with both occupancy and rent growth in the coming year.
In all, 72 percent anticipate an increase in occupancies over the next year versus 65 percent who held that view in the 2018 survey, and an even higher volume, 78 percent, expect rents to rise in the coming year. Although that optimism is surprising, it may be a reflection that respondents are also more likely to believe that construction starts will decrease over the next 12 months, notes Beth Burnham Mace, chief economist and director of outreach at the National Investment Center for Seniors Housing & Care (NIC). Nearly one-third of respondents (32 percent) are predicting a decrease in construction starts over the next 12 months, which is up from 24 percent in the 2018 survey. Meanwhile, 45 percent of respondents expect to see an increase in seniors housing starts and 23 percent anticipate no change. “There is still some concern about construction, but it is a little bit less than we have seen in the past,” says Mace. Another factor contributing to sector optimism is that a majority of respondents (76 percent) do not think construction activity will result in overbuilding.
After a tumultuous phase defined by navigating a real estate down cycle coinciding with the Great Recession, followed by a wave of high-profile mergers and consolidations, the commercial real estate brokerage industry has had a quieter stretch.
The big players have had time to digest their big acquisitions. Industry fundamentals remain strong. It speaks volumes that—given its relative weight in the industry—WeWork’s plight has drawn so much attention. It’s a sign of just how steady things have gotten.
So what’s life been like for brokers in the space? NREI last conducted research into the brokerage sector in 2015, in the midst of a heavy wave of consolidation within the industry.
It’s now four years later and we thought it was worth revisiting sentiment among brokers on how they feel about the current state of their firms, how the bigger entities are working and whether they expect to see more mergers and realignment in the future. In addition, we’ve asked some questions on culture and recruitment.
The hospitality sector is notoriously the most volatile of real estate asset classes. Business and leisure travel trends are highly correlated to broader economic conditions. And the sector does not have the benefit of long-term leases to help soften the blow of cyclical swings.
The effects of that fundamental nature of the sector are evident in our first exclusive research examining hotel investment. As a result, while the numbers are bullish and generally consistent with what NREI has found for other property types, that level of optimism is more muted. Moreover, the rise of third-party room and home sharing apps like Airbnb and VRBO is a growing concern for the sector and its outlook.
In a seemingly interminable procession, one venerable retail chain after another shuts down stores, restructures under bankruptcy protection or closes shop entirely. (In some cases, it’s been all of the above.) Retail real estate owners and managers have struggled to cope. They scramble to restructure leases or find replacement tenants. The most creative have changed up tenant mixes, bringing in more entertainment or service-oriented tenants so their income streams are less reliant on the vagaries plaguing the retail sector.
The question looking ahead is whether more of the same is in store for the sector as more sales activity shifts online or if this painful stretch is nearing its end. Based on the answers to NREI’s fifth annual research into sentiment in the space, the level of bearishness has leveled off. Some of this is a function of a more favorable interest rate environment due to the Fed’s recent rate cuts, but according to open-ended responses it also signals that investors are starting to feel better about retail real estate.
High net worth individuals (HNWIs) have emerged as an avid group of commercial real estate investors in recent years. Yet even as allocations to the asset class remain strong, investors are treading carefully amid concerns about slowing growth and the near-term economic outlook.
The latest NREI research report on HNWI commercial real estate activity shows a continued healthy appetite to expand commercial real estate holdings. More than half of respondents (53 percent) said they expect HNWIs to increase allocations to real estate over the next 12 months. Specifically, 35 percent predict an increase of 5 percent or more and 19 percent predict a slight increase of less than 5 percent. One-third (34 percent) believe allocations will remain the same, while those who think allocations will decline in the coming year are in the minority at 10 percent.
