Investors have become more optimistic about opportunities in commercial real estate (CRE) overall, but not in all property sectors. Among the major property types, the industrial sector had the highest buy recommendation, signaling investor optimism in the sector, while the retail sector had the highest sell recommendation.
Investment recommendations are based on survey data as reported in the May 2019 Situs RERC Real Estate Report. Survey respondents were composed 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 increased from 4.6 in 4Q 2018 to 5.0 in 1Q 2019, signaling investor confidence in the sector. The buy rating generally stayed below average in the last three years, except for 3Q 2016 and 3Q 2018 when the ratings were above average. The recommendation to sell increased quarter over quarter (QoQ) from 6.4 in 4Q 2018 to 6.7 in 1Q 2019.
The recommendation to sell has been above 5.0 since 4Q 2010. The incongruity between the increase in the buy rating and the increase in the sell rating likely arises from concerns about the length of the cycle but optimism about the ongoing strength of the economy.
Hold was the top recommendation, with the rating increasing from 6.6 in 4Q 2018 to 6.8 in 1Q 2019. The hold rating has stayed above 6.0 since the end of the Global Financial Crisis (GFC), except for three quarters – 2Q 2016, 1Q 2018 and 3Q 2018. The current hold rating is the highest it has been since 2Q 2015.
Similar to last quarter, most of the Situs RERC respondents recommended holding industrial assets, followed by buying. The recommendations to buy and hold were about the same for warehouse assets, whereas 27% of the respondents recommended selling. Likewise, the recommendations for buying and holding flex assets were about even, while only 11% recommended selling them. The recommendations for selling and holding R&D assets were about the same, while only 25% of the respondents recommended buying R&D assets.
About 48% of the Situs RERC institutional investors recommended selling retail assets, while 37% recommended holding. Only 16% of the respondents recommended buying retail assets. None of the respondents recommended buying regional malls. The majority of investors recommended selling regional malls. The neighborhood/community sector was the most favored retail subtype, although only 33% of the investors recommended buying the assets.
Continuing the trend from last two quarters, none of the survey respondents recommended buying CBD office. Approximately half of the respondents recommended selling CBD office while the other half recommended holding CBD office. The results for suburban office were quite different, with 36% of the respondents recommending buying, 18% recommending selling and 46% recommending holding.
Compared to last quarter, a greater percentage of investors recommended holding apartment assets. The majority (60%) of Situs RERC institutional investors recommended holding apartment assets, while 10% recommended buying and 30% recommended selling.
None of the Situs RERC institutional investors recommended buying hotel, whereas 60% of the respondents recommended holding and 40% recommended selling. By comparison, all of the respondents recommended holding hotel assets in 4Q 2018.
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