By Jon Geanakos, President, Americas Capital Markets, JLL
While year-to-date volumes in the Americas are down 11.0 percent at the close of the third quarter, capital demand for real estate globally remains at record levels and is favoring U.S. product. Volumes in real estate markets outside the United States are also anticipated to rise given leasing and investment cycles are generally not in line with those in the U.S. While year-to-date volumes in the Americas are down 11.0 percent at the close of the third quarter, capital demand for real estate globally remains at record levels and is favoring U.S. product. Volumes in real estate markets outside the United States are also anticipated to rise given leasing and investment cycles are generally not in line with those in the U.S.
This was evidenced in Canada in the third quarter, where year-to-date investment is up 31.0 percent to its highest level this cycle. In the third quarter, Canada saw an 11.0 percent increase in transaction volumes over the third quarter of 2016 – and transactions were diverse, spread across all major property types. In Brazil, volumes surged in the third quarter – favoring the office and industrial sectors – amid the market’s early economic recovery. Meanwhile, in Mexico, investment slowed during the third quarter, however, year-to-date volumes remain modestly elevated.In the U.S., the nature of investment is changing and we are seeing this impact transactions in the second half of 2017. This is happening as the appetite for real estate risk is tightening, and investment sale volumes are cooling in the latter stages of the cycle. This is evident across equity and debt strategies:
- The pace of fundraising is slowing, and real estate dry powder in North America is plateauing at $152 billion.
- Value add remains the favored strategy for raising and deploying capital, as opportunistic funds are challenged.
- Investors are shifting toward debt strategies as an alternate path to yield and in response to aggressive valuations in certain sectors and markets.
- Traditional lenders are tightening lending standards and limiting exposure to construction loans, large single asset loans and higher risk assets.
What is this reflective of? While market volatility continues to trend lower, implied real estate market volatility is elevated and higher than the economy at-large. This comes amidst waning capital appreciation and a near-certain rate hike in December. This is not deterring investor interest in real estate. However, it is impacting the nature of investment and preferred positions and structures. This is driving down conventional, single asset activities in favor of entity- and GP-level investments, strategic joint ventures and more complex recapitalizations.
What does this mean for U.S. markets? While the U.S. remains a target for global capital, this capital is sticking closer to investment criteria and underwriting opportunities more conservatively. Thus, to work toward targets while managing for risk and return requirements, entity-level and debt activities will comprise a larger share of real estate investment in the remainder of the cycle. As we move to year-end with full-year volumes down as expected (a 10.0 percent decline), we expect these shifting market dynamics to apply further downward pressure on conventional sales volumes in 2018.