After a bumpy start to 2016, investors show optimism and reversing sentiment heading into this year.
What did investors predict heading into 2016?
Two months before the Presidential election, JLL surveyed some of the nation’s most active commercial real estate investors, revealing their outlook on the markets, economic cycle and interest rates, among other topics. We asked investors when they thought the current economic cycle would peak. Despite modest bumpiness in the first six months of 2016, more than half said this would happen in 2018.
This is a positive reversion of investor sentiment from spring of 2015, when close to 40 percent of a similar group indicated they expected a 2017 peak. The reemergence of cautious optimism is obvious as volatility moderated in the latter half of 2016.
The markets, despite having priced in a Clinton Presidency, have reacted differently than most expected to Trump’s election. Compared with the initial post-Brexit reactions of 4 to 10 percent equity markets declines around the world, equity prices in the United States increased meaningfully following the election. And bond prices declined as investors were expecting higher growth, higher inflation and higher interest rates.
“Policy cards are still up in the air, but I don’t anticipate a peak in the economic cycle until 2019 in terms of GDP. In that case, growth will accelerate in 2017 and 2018, but then will begin to fade,” says Ryan Severino, Chief Economist for JLL.
JLL also asked which primary property types investors expected to perform the best over the next 12 months. Industrial was the top response, as it was when the same group was surveyed in 2015.
Investors were correct in their predictions
The industrial sector saw its second-largest year since 2008 in terms of volume, reaching $46.3 billion of trades at year-end. Severino agrees that industrial is on pace to have another big year. 222 million square feet of industrial space is under construction, putting upward pressure on rental rates and providing tenants with new supply options in a market with Class A warehouse availability constraints.
“We’ve seen broad rental growth across nearly every market as vacancy reaches an all-time low,” said Craig Meyer, President, Industrial Brokerage and Industrial Capital Markets, JLL Americas. “Institutional investors continue to view industrial real estate assets as highly desirable investment targets.”
Heading into 2016, investors indicated they were counting on value-add opportunities to deliver the best risk-adjusted returns.
What are CRE investors thinking as we enter 2017?
Going into 2017, however, investor sentiment has changed as more than half of survey respondents claimed core plus is now the way to go.
“This is interesting, since it’s a little late in the cycle for development and fixed-income investments such as core and core plus, as they could underperform in a rising interest rate environment,” says Severino. “Although provided it doesn’t take long to execute, value-add strategies could benefit from accelerating economic growth in 2017.”
Trump’s election has raised questions about what’s in store for the real estate industry, U.S. policies and the economy. Still, with strong, sustained liquidity in commercial real estate markets, this resetting of investor sentiment positions the markets well for stable growth throughout 2017.