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March 26, 2019

Commercial real estate investors in the United States are shifting their attention from smaller cities to refocus on major markets, a pull-back to perceived stability and lower risk amid expectations that economic growth is set to slow.

In primary markets – major U.S. cities like New York, Los Angeles and Chicago– office investment volumes rose in 2018 following two consecutive years of decline. Meanwhile, office investment in secondary markets fell 11 percent to US$56.9 billion.

“The shift in direction toward primary markets reflects a rising flight to quality in the capital markets,” says Sean Coghlan, senior director of investor research at JLL. “The current economic and business cycles remain top of mind for investors, particularly given moderating growth in real estate markets.”

The U.S. economy is facing a likely slowdown in 2019. GDP growth is expected to slow from the 2.9 percent it saw in 2018, according to Ryan Severino, Chief Economist at JLL.

The Fed has already made moves to address what it calls ‘conflicting signals’ in the country’s growth dynamics by pausing a three-year cycle of rate hikes, which had been projected to run well into 2020.

With a slowdown in growth on the horizon, investors are likely to change course and redirect investment to assets deemed to be safer, defensive and more likely to better weather a slowdown.

Mirroring moderate growth in real estate markets, commercial real estate investment in the U.S. is set to decrease by 10 percent in 2019, according to data from JLL.

Defensive strategies benefit multifamily

The multifamily sector grew by 15 percent to US$167.5 billion last year, driven overwhelmingly by investments in major markets. Investments in New York, Los Angeles, Houston and San Francisco multifamily assets rose by more than 35 percent.

“Investors are pursuing defensive strategies, and this is benefitting the industrial and multifamily sectors,” Coghlan says. “In line with recent growth, this is bringing more capital into these sectors from domestic and cross-border investors.”

In fact, by the fourth quarter, deals in primary markets accounted for 44.5 percent of all U.S. multifamily investments, according to JLL data, a notable 5.3 percentage point increase from a year prior.

Reflecting investors’ decreasing appetite for risk, high rise and mid-rise assets, which serve higher income tenants, saw their share of multifamily investment reach the highest level since 2010, at nearly 38 percent of activity, according to JLL research.

Click to read about what investors need to know about opportunity zones.

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Ryan Severino

Chief Economist, JLL

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