Breaking Down the Sentiments of Today’s Investment Climate

Commercial real estate is a cyclical industry. Boom periods, bust periods and, according to the Real Capital Markets’ 3rd Annual Investor Sentiment Report, the period that falls in between.

In launching this year’s survey, RCM asked investors how they would categorize the current state of commercial real estate investing:  boom, bust or other. More investors (61 percent) picked other than boom and bust combined.[

When we dive into these sentiments further, there are some interesting findings.

Attractiveness of property type remains consistent year over year

Regardless of where investors believe we are in the cycle, the investments of choice remain multifamily and industrial. Industrial properties are consistent, regardless of the perception of the cycle. However, the strength of multifamily, and the differential between multifamily and industrial, shifts considerably as the view of the market moves from boom to bust.

Overall, 36.2 percent of investors say multifamily is the most attractive asset class; 28.4 percent prefer industrial—a significant differential. When the market view shifts to bust, that differential changes:  multifamily at 30.8 percent and industrial at 28.8 percent—a much smaller differential. This may be because of increasing concerns by some investors that prospects for consistent apartment rent growth are diminishing.

Factors of influence intensify with market position

When we look closely at CRE investors who believe the disparity between bid and ask prices is the most likely to influence activity in 2019, we are able to identify some interesting trends.  As the perceived strength or position of the market weakens, the perceived influence of these factors increases substantially. For example, a change in the economy was identified as a factor of influence by 50 percent of those who say the market is booming; but when the characterization shifts to bust, the potential influence of the economy increased to 75 percent. 

Other interesting comparisons between boom, bust and other sentiments include:

  • The strength in the conviction of investors’ 2019 strategies—whether they will buy, sell or hold changes according to their characterization of the market. While investors of all perspectives remain more likely to be buyers than sellers, those who say the market is a bust are twice as likely to be sellers.
  • There is another noticeable sentiment shift when the dialogue turns to the impact of increasing interest rates. Investors who classify the market as either boom or other are most likely to say that increasing interest rates will not make a difference in their acquisition plans for 2019. Those who classify the market as bust say they are less inclined to buy than any other activity. Further, those identifying the market as a bust are twice as likely to be more inclined to sell than the other two market classifications.

While it is interesting to break down numbers, it is also important to take a step back and put the market in perspective. For the past decade we’ve experienced unprecedented levels of investment activity, with each year establishing another new record. As we enter a period when more than 60 percent of investors put the market in between boom and bust, and words like ‘plateau’ and ‘flattening’ are now entering the lexicon, it’s important to note how far the market has come and how long it has been sustained.  It’s also important to recognize that in these times, plateaus are part of a healthy cycle.

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