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New York, NY – Investors have retreated from commercial real estate (CRE) and equities since June 2022, when the Federal Reserve began aggressively raising interest rates. While most investors are still sitting tight amid capital markets uncertainty, sector preferences began to shift in the second quarter of 2023, according to the latest quarterly ValTrends report, "Pockets of Opportunity."
The report can be downloaded here: https://www.situsamc.com/valtrends2q23
The 28-page report, authored by Peter Muoio, PhD, Head of SitusAMC Insights, and Jen Rasmussen, PhD, Vice President, SitusAMC Insights, includes extensive research, exclusive investor sentiment surveys, and analysis on valuation trends and space market fundamentals from 2Q 2023.
"So many dramatic things have happened that have effectively frozen up much of commercial real estate," Muoio said. "The interesting juxtaposition is that for many segments, the space market conditions and the operating fundamentals haven't changed. But the capital markets have changed -- and that's changed everything."
Key findings from the latest ValTrends report include:
A record number of investors prefer to hold. For the second consecutive quarter, 91% of investors surveyed chose to hold, while only 3% say they would buy and 6% would sell. "That's more dramatic than we saw in the Global Financial Crisis (GFC), when 'hold' rose to 48% of market participants," Muoio said.
Investors are favoring retail as demand and occupancies improve. The sector, buffeted in recent years by overbuilding, online shopping and the Covid-19 pandemic, was named by 36% of respondents as the best property type, up from just 11% a year ago. "Retail values took their hit in the early part of the pandemic," Rasmussen said. "By 2024, retail returns are expected to reach a seven-year high." Second-quarter rent growth hit the highest level since the onset of the pandemic. That trend could continue for a few years amid muted construction; the sector has the lowest projected value decline of all property types examined.
Woes continued for the office sector. More than 90% of investors named office the worst property type. Tech layoffs have amplified the impact of hybrid and remote work on space demand, and transaction volume remains weak. The few geographic bright spots include Orlando, Fort Lauderdale and Kansas City, which have benefited from softer construction projections. The sector's downturn has led to significant cap rate increases.
Multifamily faces short-term challenges. Rent growth will slow and vacancies rise as more supply comes online over the next 18 months, but those effects will be short lived. "Supply will settle back down, demand will increase and vacancies revert back to very low levels," Muoio said.
Industrial is still going strong, with a positive outlook for rent growth. Manufacturing activity grew in June and July, just slightly below the record set before the start of the GFC, bodes well for future tenant demand. In addition, second-quarter warehouse occupancy hovered at a record high, though net absorption and rent growth slowed. However, rents are still up about 40% from the pre-pandemic period, and "owners are going to continue to reap the benefit of significant rent growth as leases expire," Rasmussen said.
Investors are eyeing alternative property types. They include the health care sub-segments, such as medical offices, which is benefitting from an aging population and soaring health care spending. Other pockets of opportunity include senior housing, student housing, affordable housing, self-storage, and to a lesser extent, data centers.
The ValTrends report “Pockets of Opportunity,” is designed to provide commercial real estate market participants with the actionable intelligence they need to make informed decisions for their investments and stay ahead of the curve. The release of this thought leadership report underscores SitusAMC’s commitment to powering the lifecycle of real estate finance. The analysis and insights provided in this report are invaluable to those seeking to stay informed and competitive in today's fast-paced business environment.
SitusAMC (www.situsamc.com) is a leading independent provider of technology, strategic outsourcing, talent and advisory solutions to the commercial and residential real estate finance industries. The company helps clients identify and capture opportunities in their real estate businesses through industry-leading services and innovative technologies that drive operational efficiency, increase business effectiveness, and improve market agility across the entire lifecycle of their global real estate activity.
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