How confident are investors in commercial real estate? Not as confident as they were in 2014. Today? Investors can best be considered cautiously optimistic in the commercial sector.
That’s the big takeaway from the third quarter NREI/Marcus & Millichap Investor Sentiment Survey. As Marcus & Millichap says early in the report, investors are displaying a gradual cooling toward commercial real estate.
This isn’t new. Marcus & Millichap reports that investors have been growing sligthtly less enthusiastic about commercial real estate since 2014, a year in which they were the most bullish on the prospect of sinking their dollars in industrial, multifamily, retail and office properties.
Investors still believe that commercial real estate is a good home for their dollars. They’re just a bit more concerned about its long-term performance.
“It looks like 2014 may have been the peak of sentiment,” said John Chang, first vice president of research services at Marcus & Millichap. “That doesn’t mean that we won’t see it push upward again. But right now, we are seeing a modest softening in investor perspective.”
What’s behind this softening? Marcus & Millichap points to the uncertainty investors have about the future prospects of the Trump administration. Investors are also looking at modest tightening in the capital markets and increases in the price of properties.
According to Marcus & Millichap, nearly half of respondents to the sentiment survey still have confidence in the U.S. economy and expect a positive lift from the Trump administration. But there has been a noticeable dip in confidence when compared to the fourth-quarter survey, one that was taken immediately following the presidential election.
In the most recent survey, 49 percent of investors said that they expect construction levels to rise during the next two years. In the fourth-quarter survey, 56 percent thought they would rise. About 32 percent of third-quarter respondents said they do not expect construction levels to rise while 19 percent said they were unsure.
Marcus also asked investors whether they expected the United States to go into a recession during the next two years. A total of 27 percent of respondents said that the odds of this happening are now greater. This is up from 18 percent of respondents who said the same thing in the fourth quarter of last year.
In a bit of optimism, 57 percent of respondents said that they expect the Trump administration’s proposed policies to be supportive of real estate values and investment activity. This is also down from the fourth quarter 2016 survey, when 65 percent of respondents expected the Trump administration policies to boost real estate values.
“Sentiment is still leaning toward the positive side, but we are seeing some movement relfecting emerging investor caution because they are not sure what will happen with the range of policies on the table,” Chang said.
And in what might be the biggest reason for caution from investors, 71 percent told Marcus & Millichap that they thought the commercial real estate values might be nearing their cyclical peak.
Investors, of course, are higher on some commercial sectors than they are on others. And one sector that they remain particularly impressed by is industrial. Marcus & Millichap reports that 47 percent of investors consider this a good time to buy more industrial properties, while 35 percent think this is a better time to hold. The survey found that 18 percent think this is a better time to sell.