U.S. commercial real estate executives are aggressively confident on industrial, infrastructure and multi-family asset classes in 2017. This conclusion comes from 2017 Real Confidence Executive Index, a survey recently released by Altus Group, a consultant company for large commercial developments, in collaboration with the National Association of Real Estate Investment Trusts and the National Council of Real Estate Investment Fiduciaries.
The tax cuts and increased spending promised by the new Trump administration are expected to strengthen the commercial real estate market in 2017. Richard Kalvoda, of Altus Group says that the U.S. transition of government has prompted expectations in the industrial and infrastructure sectors and that his company is seeing this impact in the survey results.
The Real Confidence Executive Index survey asked industry leading C-suite level CRE decision makers on how they would allocate a theoretical $1 billion in commercial real estate investments to get the best returns for 2017. The Index is based on these allocations and represents a total theoretical investment of $65 billion in a variety of commercial real estate investment opportunities. The 2017 index saw 43% of the total capital allocated to direct real estate investments or private equity, followed by 30% to public equity, commonly known as REITs. On the debt side, private debt received a 20% allocation while public debt received 7%.
Industrial Sector Preferred Asset Type For Investment
The industrial sector is believed to be the greatest beneficiary of the changes expected to come from Trump administration. It received the highest allocation in both public and private equity selections with a 40% year-over-year increase in industrial from the private equity selections and a 61% increase in industrial from the REIT side when compared to the 2016 survey.
For private equity, the West received the highest industrial allocation at 38%. The East received 34%, which represents a 108% increase over 2016.
The survey also reveals multi-family remains a stable asset class as it was the second investment choice among respondents in both private equity and REITs. Dropping from its first place spot in 2016, the year-over-year allocation increase was minimal in the REIT sector, but up 17% in private equity. Altus Group says that the continued rental demand, along with the challenging consumer lending environment, contributes to the expected stability of this asset class in 2017.
Key Highlights from the Real Confidence Executive Index
- Allocations to the infrastructure sector grew by 216% from the 2016 survey, driven by the anticipation of major infrastructure projects under Trump administration.
- Portfolio diversification was a key trend as only 8% of the respondents put all $1 billion into one quadrant which included two all-REIT portfolios and three all-private equity portfolios suggesting market volatility and uncertain political expectations played a role in the allocations with investors choosing to minimize risk factors.
- While respondents in the survey still preferred direct private equity CRE investments in the West, the East-West allocation gap tightened with the West representing only 5% more over the East, supported by an allocation increase of almost 20% year-over-year in the East and a 15% decrease in the West.
- Private debt financing had a significant increase, up 52% over last year. Investment interest in public debt also grew with a focus on CMBS – AAA securities which were up over 20% compared to the 2016 survey.
One of the survey participants, Mike Miles at Guggenheim Real Estate, LLC says that the survey results demonstrate a large overweight allocation to the industrial sector, while the potential issues with retail, apartments and office are real and very apparent”. According to him the potential issues with the industrial sector are less apparent at this time. A potential change in trade policy expected from Trump administration would impact on this sector, causing a shift in both the type and location of the most desired industrial assets.