What's the Latest with the Commercial Real Estate Market
November 18, 2020
Here's the newest edition of our continuing series on What's the Latest with the Commercial Real Estate Market.
To dive deeper into the state of the commercial real estate market and the economy here and abroad, keep on reading. (We have graphs!) Interested in watching a video on these market updates? Click here for our YouTube Channel.
TL;DR - Real estate owners and investors may be bearish about the immediate future, but most are more bullish about the longer-term future.
Part I: Future Projections of Transactions
The real estate business is a cyclical one. Sometimes there are huge upswings and sometimes there are tremendous low points. Whatever the conditions of the market, the business of conducting commercial real estate transactions tends to stay afloat. Whether the market is good or bad, investors still need to trade. The problem with the COVID pandemic was it forced everyone to pause or delay their plans. Nothing hurts the industry more than a stoppage of transactions.
From the chart above from NREI, survey results from a group of investors indicated that the majority of investors in commercial real estate plan to add to their real estate portfolios. In fact, nearly one third of respondents said they would add anywhere from 5% - 20% more in their commercial real estate portfolio. While this is certainly encouraging news, the greatest majority of investors said they would still remain on the sidelines.
Part II: Current Sentiments of Investors
Sentiment surveys give users the ability to gauge how respondents feel about something. What these surveys lack in cold, hard stats they make up for in expressing confidence (or a lack thereof) on a given topic. You might have a lot of money in the bank, but if you don't feel good about spending it, you probably won't spend it.
From the chart above from NREI, the results of the semi-annual Investor Sentiment Index were recently released. The respondents were asked in the first half of 2020 what their projections were for the second of the year. Not surprisingly, respondents thought that things would be bleak. In fact, this sentiment survey hadn't seen results this bleak since 2009. We'll be watching for the results of the first half of 2021 sentiments.
Part III: Growth in Real Estate Investments
Assets Under Management (AUM) is a useful metric to track to see how people are investing their cash. Outside of your typical stock, bond, and cash markets, you have a collection of alternative assets. Those include private equity, real estate, private debt, and other means of investment.
From the chart above from Preqin, real estate assets are projected to increase at a respectable rate of about 3.5% per year over the next five years to a total of over $1.2 trillion. While this is good news for the commercial real estate sector, as a percentage of all AAUM, commercial real estate seems to be going out of fashion. When compared to other investment vehicles, more investors are projected to favor private equity, hedge funds, and private debt over commercial real estate.
Here's to the Fundamentals.