In Chicago and nationally, commercial real estate investors, brokers and lenders all agree that the industry will see strong activity for the first half of 2020. However, dynamics such as a decelerating economy, trade conflicts, labor availability and the presidential election may turn some actors into fence-sitters by the second half of the year.
The 2020 RCM/LightBox Investor Sentiment Report polled CRE professionals, lenders and economists about where they see the multifamily, industrial and office sectors headed by the end of the year. The results of the report showed a lot of optimism tinged with looming shadows in the third and fourth quarters.
Almost 70 percent of survey participants believe that investment activity this year will be the same as in 2019, if not higher. An even larger majority, nearing 80 percent, feel that sale prices in 2020 will be the same or higher than in 2019.
More than a third of respondents point to a change in economic conditions—such as interest rates, corporate growth or stock market levels—as a top threat to CRE investment. A similar selection of those surveyed expect to see a potential mid-year “wait and see” delay in deal velocity as everyone pauses for the election to be completed.
“We’ve reached a very interesting point in this current real estate cycle, marked by conflicting investor sentiments that range from optimism to taking a more cautionary tone,” said Tina Lichens, chief operating officer, RCM/LightBox. “At this stage in the investment cycle, investors are challenged to be more creative, thoughtful and strategic as they make investment decisions.”
According to the report, some investors are moving away from value-add opportunities toward 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.
Currently, availability of capital and the current fundamentals are the biggest drivers of activity in 2020, according to more than three-quarters of respondents. However, various CRE professionals believe that a tap on the brakes is imminent. This may even be true for the juggernaut that is industrial.
“Most threats to the market, and industrial in particular, are geopolitical in nature—tariff issues, the relationship with trade partners and the net levels of import and export activity,” said Geoffrey Kasselman, SIOR, LEED AP, senior vice president and partner with CRG, a Chicago-based national real estate development and investment firm. “The question with China is will they consume our exports? Is China’s economy built on a bubble that is ready to pop? The combination of these two factors happening together will have an impact on our economy; not significant, but it will have an impact.”
Despite these headwinds, the industrial sector is a strong beacon for investors in markets around the country and in Chicago, as evidenced by robust leasing and construction levels, as well as long-term rental growth. Assuming major e-commerce players such as Amazon continue to expand their presence, investors should follow.
“E-commerce is doubling and redoubling, and the marketplace is working to catch up to Amazon,” Kasselman said. “As retail is being reinvented to become more experiential, a big part of the experience is how quickly you can buy goods and have them delivered.”
That theme of reconstruction and evolution isn’t limited to the retail sector. Many of the survey’s respondents fully expect to see shifts in strategies as various factors and uncertainties chip away at was has been an incredibly fruitful period for the commercial real estate industry.
“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,” said Lichens. “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.”
Lenders are taking a more defensive stance as they evaluate LTVs, individual debt exposure by property, property cash flow and tenant and business line. Though many of the responding lenders report heading into the year with optimism for stable to strong deal velocity, any change to the low interest rate environment could sour their mood.
“We’re expecting to see more of the same,” said Sue Blumberg, senior vice president and managing director of the Chicago office of NorthMarq, a national lender. “We’re projecting a 5 to 10 percent increase in origination levels in 2020 compared to 2019. Where we’ll see the most activity is also more of the same with multifamily and industrial leading the pack and healthy levels for office properties.”
Perhaps still feeling the sting from the Great Recession, investors, developers and lenders have largely shown a lot of restraint throughout this extensive expansion cycle. That discipline will have to be fine-tuned as we progress deeper into 2020 as lending criteria more narrowly focuses and investors grow more cautious.