Commercial Real Estate: Apartment sector investment conditions surge in 4Q 2018

Investment conditions improved dramatically in 4Q 2018 for the apartment sector with mixed results for other major sectors – office, industrial, retail and hotel.

That’s according to a survey conducted by Situs RERC, which has released its 4Q 2018 Flash Report, a preliminary look at institutional investment conditions, required cap and yield rates and other investment criteria based on its survey results as of December 17, 2018. The survey respondents rated investment conditions on a scale of 1 to 10, with 10 being excellent.

Investment conditions for the apartment sector rating soared from 5.6 in 3Q 2018 to 7.6 – the highest rating of any subtype or sector – in 4Q 2018, according to the preliminary results. A year ago, the rating was 5.1. The rating for invest­ment conditions has stayed above 5.0 for the apartment sector in almost every quarter, dat­ing back to at least since 4Q 1991 when Situs RERC began collecting these data.

Investment conditions improved slightly for the overall office sector quarter over quarter (QoQ), inching up for both CBD and suburban office, according to the survey respondents. Year over year (YOY), CBD’s rating fell from 5.6 in 4Q 2017 to 5.3 in 4Q 2018 and increasing from 5.1 to 5.4 for suburban office in the same time period. In both categories, the numbers have remained fairly constant since 4Q 2016, in the range of 5.2 to 5.6 for CBD and 5.1 to 5.4 for suburban.

The investment conditions rating for warehouse soared QoQ from 6.1 to 7.4, according to the preliminary figures, but dropped for R&D from 4.8 to 4.0 and for flex from 4.8 to 4.2. Compared to a year ago, only warehouse had a higher rating (6.7 in 4Q 2017), while both R&D (5.6 in 4Q 2017) and flex (5.8 in 4Q 2017) dropped considerably.

Investment conditions for the regional mall and power center subtypes continued to plunge, but the neighborhood subtype improved significantly, both QoQ and YoY. For regional mall, the rating dropped from 4.7 in 3Q 2018 to 3.2 in 4Q 2018, according to the preliminary survey results. In 4Q 2017, the regional mall rating was 5.3. The power center numbers dropped as well, but not as dramatically, from 5.4 in 3Q 2018 to 4.7 in 4Q 2018. As with regional mall, the power center rating was 5.3 in 4Q 2017. The only positive news was in the retail-neighborhood subtype, which jumped from 5.8 in 3Q 2018 to 6.3 in 4Q 2018, a slight rise from 6.1 in 4Q 2017.

Investment conditions for the hotel sector dropped significantly, from 6.0 in 3Q 2018 to 5.0 in 4Q 2018. In 4Q 2017, the rating was slightly higher – 5.3. Investment conditions have been rated as above average in every quarter since 4Q 2010, but this trend is in danger of ending in 4Q 2018, depending on the final survey results.

Though the economic outlook has tempered a bit, we generally find ourselves in a healthy economic environment. However, this economic backdrop is not bolstering the stock market, which had it worst year in a decade; in Decem­ber, the Dow, S&P and Nasdaq all plummeted about 9%. By comparison, the stability of CRE returns make the asset class all the more appealing.

With inflation near the 2.0% target set by the Federal Open Market Committee (FOMC), the Fed increased its benchmark rate to a range of 2.25% to 2.5% at its December meeting in order to stay ahead of inflation generated by the strong labor market and the sustained eco­nomic expansion. However, the Fed has lowered its growth and inflation forecasts for 2019. GDP growth is expected to be 3% in 2018, while the 2019 forecast was revised down slightly from 2.5% to 2.3%. Expectations are for two more rate hikes in 2019 – originally, three hikes were projected – as concerns over the stock market correction loom.

Although IRRs shifted among the property types, the average real estate yield was unchanged from 3Q 2018. The November 30 quarter-to-date (QTD) averages for both Moody’s Baa and Moody’s Aaa increased from 3Q 2018, caus­ing the spreads between real estate yields and corporate yields to narrow further over the last quarter. As of Novem­ber 30, the QTD 10-Year Treasury rate was 3.1%, which increased over the third quarter’s average and narrowed the real estate yield over the bond yield.

We note that the Situs RERC Flash Report presents only a preliminary look at our 4Q institutional investment survey data and reflects only the information drawn from surveys received to date. As additional investment survey data con­tinue to come in, they will be integrated with current data and reported in the 4Q 2018 Situs RERC Real Estate Report, set for release in February. Our report is the nation’s longest-running real estate research report offering investment criteria and investor insights on all the major markets and property types.

To purchase the complete Flash Report or to subscribe to the Situs RERC Real Estate Report, visit or call 319-352-1500.

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