Posted on August 24, 2017 at 12:00 PM
Current and future economic trends, such as fiscal and political policies, raise concerns among real estate investors. According to the Bureau of Economic of the FRED, gross domestic production grew over the past three quarters and its rate is expected to remain between 2% to 3%. In addition, the July jobs report shows that U.S. employers added 209,000 jobs in July and that the unemployment rate fell to 4.3%, the lowest rate since August 2007. This economic growth and the fact that U.S economy is still adding jobs, should give the Fed the green light to raise interest rates again, even if inflation remains below the Fed's target. These factors raise uncertainty and concerns among real estate investors, but despite increasing caution, investors continue to show strong motivation to invest in real estate.
Exclusive research conducted by Marcus & Millichap in the third quarter of 2017 shows a gradual decline in investor sentiment, in index rating of 150 as compared to 153 in fourth quarter of 2016. The survey was conducted between June 8-19 with 616 participants, including public and private commercial real estate investors, developers, advisors, lenders and REITs.
Overall, the results show a modest softening in investor perspective and a noticeable decline in sentiment compared to the fourth quarter survey. Uncertainty, related to the new Trump administration, fiscal policies and property price increases, is the main reason to the decline in sentiment. For example, 27% of the respondents think that the likelihood of a recession over the next two years is greater, compared to 18% in 2016. In addition, most of the respondents expect increased trade protection and immigration policies to be least favorable to the commercial real estate industry. The decline in sentiment is also effected by the fact that a majority of investors (71%) believe that commercial real estate prices may be approaching a cyclical peak.
Despite the uncertainty and the decline in sentiment, nearly half of respondents still have confidence in the economy and a positive outlook from Trump administration. 57% of the respondents expect the Trump administration’s policies to be supportive of commercial real estate and investments, while expecting less regulation and lower taxes policies.
The survey results also show that despite the uncertainty, investors still have high confidence related to property performance and fundamentals, such as vacancies and rent growth. Most owners are optimistic that values will continue to increase over the next 12 months and believe that commercial real estate offers favorable returns compared to other investment classes. This positive outlook and the fact that many investors see the market uncertainty as a window of opportunity, has lead the majority of the respondents (73%) to move forward with plans to expand portfolios and to increase their commercial real estate investment in the next 12 months (59%).
In conclusion, according to this Marcus & Millichap sentiment research, it seems like some investors are using more caution with commercial real estate investments and are waiting for additional clarity on policy. Despite this, many investors remain confident in fundamentals and the economy overall, believe that market is approaching a peak and plan to boost their commercial real estate investments. .
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