No one knows what the still-new presidential administration will do, or tweet, on a daily basis. The promised repeal of Obamacare thrills some and worries others. Terrorism attacks span the globe.
It’s an uncertain world.
But one thing isn’t changing: Investors, both domestic and foreign, still love commercial real estate.
That’s the takeaway from Chicago-based audit, tax and advisory service Grant Thornton’s new research report, The Future of Growth and the Real Estate Industry.
Greg Ross, construction, real estate, hospitality and restaurants partner and sector leader with the company, said that there are plenty of uncertainties today to make investors nervous. But these uncertainties aren’t preventing them from sinking their dollars into commercial real estate.
“Investors are worried about what might happen with tax reform. There is a lot of uncertainty there,” Ross said. “Changes in interest rates. These have a significant impact on real estate, and they do make investors nervous.”
But … there are still plenty of positives that make commercial real estate one of the top choices for investors, Ross said.
Add to that a fairly strong U.S. economy, and you can see why investors are pouring even more of their dollars into office towers and multifamily properties.
“Right now, real estate values are strong,” Ross said. “Consumer confidence is high. Unemployment rates are low. Interest rates, despite increases, remain historically low. Basically, investors today have a few more dollars in their pockets as a result of all this. That all contributes to a favorable real estate market today. The general macroeconomics are strong. Commercial real estate remains very attractive to investors, especially the more sophisticated investors out there.”
A changing market
While investors continue to target commercial real estate, the makeup of these investors is changing. Investors, Ross said, are becoming ever more sophisticated.
“There is a lot more private equity in our space today,” Ross said. “There are more pension funds. Again, we are seeing an influx of sophisticated investors.”
Ross said that today’s newer investors aren’t approaching commercial real estate in the same way that more traditional investors – often family investors – did.
Those investors held onto their investments for a long period, waiting for them to steadily increase in value. Today’s investors, though, are looking for quicker gains, planning to hold onto their commercial real estate for maybe five years before selling.
“They are looking at what they can do in five years to increase the value of these investments,” Ross said. “They want to increase the value, protect the value and then turn it over in five years.”
Overseas investors continue to play a big role in commercial real estate. Ross, in fact, expects foreign investors to put their dollars in U.S. offices and multifamily properties at an even quicker pace considering the uncertainties and struggles bewildering so many countries across the globe.
As Ross says, there are plenty of economically weak foreign markets today. Investors in these markets are looking for a more stable place for their investments.
U.S. commercial real estate is that stable place, Ross said.
“What is going on in other countries, issues such as Brexit, make the United States even more attractive,” Ross said. “They can make a more secure investment here than what they could do in their own countries. Our most sophisticated clients are looking to diversify what they currently have. That makes the United States more attractive for some of our larger international clients.”
The investment potential of industrial real estate
The industrial real estate market remains a strong one across the United States. And Ross says that he expects this asset class to remain a favorite among investors.
Ross said that new construction in the industrial sector, despite the increase of spec projects in many major markets, remains relatively slow. This has led to low vacancies and higher asking rents for well-situated industrial projects.
At the same time, the way companies are using industrial space is changing. Data centers are filling this space, as are e-commerce giants such as Amazon. This makes the industrial sector a busy one, and an attractive one to investors.
“It is a simple supply-and-demand issue,” Ross said. “There is a lot of interest out there in industrial real estate. People have redeveloped some of these assets. They are transforming older assets. They are attracting new users who want to get their products to customers in less time. It is very interesting in that space right now, and I don’t see anything changing for industrial at least for the short term.”