The markets have seen ups and downs at a dizzying pace since early 2020, and the future looks fuzzy to most. Mark Gibson, CEO of Capital Markets, Americas, JLL, shared his perspectives in a wide-ranging discussion with Officecast attendees on the commercial real estate capital markets. Here, a brief look at some of the macro themes Gibson shared that are impacting where we are today:
Economic/political influences: There is ongoing uncertainty over the U.S. elections, and the future of 1031 exchanges and capital gains. “I think there will be more downsizing in corporate America as some inefficiencies are discovered,” Gibson said, predicting that companies will become leaner and more efficient.
Allocations increasing: “Hard assets” like real estate remain in favor as a defensive investment, and the low interest rate environment is accelerating the rotation out of fixed income and into real estate.
Expanding investor universe: Institutional equity across the spectrum is participating, and private/family office investors are very active. Cross-border buyers with U.S. teams are also increasingly active on the buy-side.
Liquidity in debt and equity markets: There is liquidity across all property sectors, and the debt market is highly liquid and largely back to pre-COVID pricing for most property sectors.
Pricing: “We’re setting records almost every week in the industrial market,” Gibson said. He has also seen record pricing for life sciences and portions of the multifamily housing market. The cap rate compression occurring in several property sectors is in part due to low-cost debt availability. Investors are closely monitoring rent collections; capital expenditures are facing increased scrutiny.
Hold periods increasing: Bid-ask gap and price discovery are hindering sales in retail, hospitality and office in certain geographies despite some investors having accelerated transactions prior to the U.S. election. “Loan forbearance, rent relief and stimulus packages are deferring quite a bit of normal selling we’d see in the market, and that is increasing the hold period as well,” Sambla added.
Property type interest diverges: Industrial and multifamily housing are in favor due to both economic fundamentals and relatively low capital expenditure needs. Additionally, defensive sectors have seen a near-term boost with life sciences, medical office, stable income (net lease, core office) and single-family rentals.
Structure, configuration of real estate: Office is here to stay but the format and functions will change. Future office performance considerations include distributed work, urban vs. suburban, flexible working, space design and the need for collaboration/innovation. Supply chain risk mitigation will also boost industrial demand.
Operator/allocator models in debate: “The models are blending, as they were pre-COVID,” said Gibson. The operator/developer platform is in favor for investors. Canadian models (integrated investment management and development) are being considered and implemented by many large LPs.
Public/private market interplay: REIT mergers and acquisitions have slowed as REITs focus on internal strategy; underwriting is disciplined, so larger deals are difficult. Significant private market capital formation is “really driving many companies to think about not going public that were going public, simply because there is ample capital in the private sector,” according to Gibson.
Geographic investment trends: The long-term trends seen pre-COVID are all intact, including migration to the Sun Belt and “no income tax” and business-friendly states. Many budgets are challenged in heavily indebted states and municipalities, which will affect underwriting. Housing affordability issues and rent control regulation continue to influence investor behavior as well.
Acceleration in tech adoption: Shelter-in-place orders drove e-commerce penetration from 11% to 16%. The U.S. saw record e-commerce leasing in industrial in YTD Q3 2020, and select mega-cap tech users continue to move forward with large-scale expansion plans. New, creative technologies will drive efficiencies in all aspects of CRE: property management, leasing, investing, transactional markets, and more.
Overall, commercial real estate has performed very well over the past 15 years, providing relatively high average annual returns. Gibson said institutional and high net worth allocations to real assets are increasing, and rising allocations of new capital will, over time, increase capital flows into the asset class, reducing price volatility and supporting valuations.
In addition, institutional investment into commercial real estate has increased by 53% across the prior cycle as the cohort seeks to diversify into higher-yielding asset classes. Institutional investors (pension funds, insurers, sovereign wealth funds, etc.) with longer duration investment horizons have also increased their presence in the U.S. markets during this time.
Looking ahead, Gibson stated that compared to other developed countries, the U.S. offers competitive yields as the global recovery commences.
This post is brought to you by Marcus & Millichap, sponsor of NAIOP’s Officecast 2020. Learn more about Marcus & Millichap at www.marcusmillichap.com.