CRE investors, brokers, lenders expect rush to place capital ahead of U.S. election

Real Estate | 5 Feb |

According to a new report, commercial real estate investors, brokers and lenders are expecting a potential surge of activity in the first half of 2020. Report participants noted the intersection of strong market fundamentals, ample investor capital, the potential for increasing headwinds generated by a slowing economy, and the impending presidential election as contributing factors.

The 2020 RCM LightBox Investor Sentiment Report, incorporating views from investors, brokers, lenders and economists, found that nearly 70 percent of participants in the report believe investment activity levels in 2020 will be the same or higher than in 2019. Almost 80 percent believe sale prices in 2020 will be the same or higher than in 2019.

“I think in the first half of the year, capital will rush to put money to work ahead of the election and before the Fed changes its mind on interest rates,” says K.C. Conway, MAI, CRE, CCIM Chief Economist and Director of Research & Corporate Engagement, Alabama Center of Real Estate (ACRE). “The wind is at your back for the first six months.”

Along with the expression of continued optimism, many experts expect to see shifts in strategies in the face of strengthening headwinds and the various uncertainties that are beginning to shape the commercial real estate landscape.

Highlights of the 2020 RCM LightBox Investor Sentiment Report include:

• Lenders are taking a more conservative look at property values, loan-to-value ratios (LTVs), and other underwriting factors, to hedge against a slowdown

• Multifamily and industrial properties will continue to dominate, with further investment targeting vibrant markets experiencing population and business growth

• E-commerce activity will heighten in markets with 2 million or more residents and spur development and investment tied to last mile delivery, food products, and general consumer goods

• The presidential election will create a pause around mid-year as investors take a “wait and see” attitude and hold onto capital

In addition to the highlights above, several experts shared their industry perspective around shifting strategies for investors in light of market threats and drivers for 2020.

“We’ve reached a point in this current cycle, where optimism and discipline continue to prevail and drive investment activity, but not necessarily for everyone,” says Tina Lichens, COO, RCM LightBox. “Investors expressing a more cautionary tone aren’t completely pulling back but instead are adapting their investment profile and looking at different markets and risk profiles.”

Shifting Strategies in 2020

Throughout this extensive expansion cycle, investors, developers and lenders have been lauded for their discipline. Today that level of discipline is being fine-tuned further, with lending criteria more narrowly focused to take a more defensive approach. Among the changes cited by Sentiment Report participants are:

• Some investors are moving away from value-add opportunities to stabilized assets that produce healthy, predictable cash flow.

• Landlords are looking more closely at rent rolls and how to extend leases to ensure a high occupancy in three to five years.

• Lenders are being more careful in evaluating LTVs, individual debt exposure by property, tenant and business line and property cash flow.

Greatest Threats, Biggest Drivers

The top threat to CRE investment, noted by 34.5% of Investor Sentiment survey respondents, was a change in economic conditions, such as interest rates, corporate growth or stock market levels. A potential mid-year “wait and see” pause due to the election was noted as the top threat by 33.8%.

Aggregated, nearly 78% of survey participants say availability of capital and the current fundamentals are the biggest drivers of activity in 2020. While there is considerable optimism about the CRE market, various commercial real estate professionals believe that a “tap on the brakes” is imminent.

“If I had to put a word on the coming year in terms of the economy and the market, the word would be deceleration,” says Hugh F. Kelly, PhD, CRE Special Advisor, Fordham University’s Real Estate Institute. “We’ve enjoyed a very long run of expansion. At the very least we should be focusing on things slowing down in 2020.”

To download a copy of the 2020 RCM LightBox Investor Sentiment Report, click here.

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