Investors are becoming more optimistic about opportunities in commercial real estate (CRE) as evidenced by an increase in the recommendation to buy. Investors explain that optimism by pointing to the current strong economy and solid property fundamentals. Favorable economic conditions, including historic employment gains, are expected to allow further room for rent growth. This, in turn, will support strong valuations and prices, they believe.
Investment recommendations are based on a Situs RERC survey of institutional investors who represent pension funds, insurance companies, financial institutions and private equity firms. Respondents rated investment recommendations on a scale of 1 to 10, with 10 being excellent.
The recommendation to buy rating increased from 4.7 in 2Q 2018 to 5.1 in 3Q 2018, signaling increasing investor optimism for the CRE market sector. The buy rating climbed back from a post-recession trough of 4.3 in 3Q 2017. 3Q 2018 marks the first time in two years that the buy rating has been above average; however, it remains well below the post-recession average of 5.7. The recommendation to sell rating decreased significantly quarter over quarter (QoQ) from 7.2 to 6.6, after rising by the same amount the quarter before, when it reached the highest rating in almost three years. The hold rating fell from 6.6 in 2Q 2018 to 5.9 in 3Q 2018, the largest change among the three recommendations. Except for a brief drop in 2Q 2016, the hold rating has been above 6.0 since the end of the GFC.
QoQ, Situs RERC institutional investors were much more inclined to recommend holding industrial assets and much less inclined to buy assets. Buying was still the top recommendation for the warehouse subsector, despite a quarterly decline in the recommendation. More than half of the respondents recommended holding R&D and flex assets.
Fewer than 20% of Situs RERC institutional investors recommended buying retail assets in 3Q 2018, indicating their loss of confidence in the sector. QoQ, there was an increase in the recommendation to sell retail assets (from 27% to 38%). Among the retail subtypes, the sell rating was the highest for regional malls and power centers and the hold rating was the highest by far for neighborhood/community centers.
No survey respondents recommended buying CBD office, 36% recommended selling CBD office and 64% recommended holding CBD office. The results were similar in 2Q 2018, when also no survey respondents recommending buying CBD office. This quarter, respondents were more mixed regarding the sell and hold recommendations. In 2Q, only 10% recommended selling CBD office, and the remaining 90% favored holding CBD office. Similar to last quarter, respondents indicated that if they were to be given the opportunity to rate each recommendation (instead of providing a single recommendation), the ratings for each recommendation would be about average. When forced to make an overall recommendation, respondents stated that either sell or hold slightly edged out buy as the top recommendation.
The results for suburban office were significantly different from CBD office in 3Q 2018, as 64% recommended buying, 9% recommended selling and 27% recommended holding. That represents a significant increase in the buy recommendation for suburban office in 2Q 2018, when 33% recommended buying and a significant decrease (from 56%) in the hold recommendation. There was only a slight QoQ decrease in the recommendation to sell, from 11% to 9%.
Investors were roughly split between selling and holding apartment assets, at 38% and 39%, respectively. Buying was the least recommended option. In 2Q 2018, a greater number of respondents (30%) recommended buying, about the same (40%) recommended selling and fewer (30%) recommended holding.
Respondents are more optimistic about the hotel sector with a quarterly increase in the buy recommendation, from 17% to 33%. Holding was the top recommendation for hotel at 50% and selling was the least popular recommendation at 17%.
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