Each year, CBRE releases an annual “Americas Investor Intentions Survey.” CBRE asks real estate fund managers, developers/owners/operators, REIT managers, investment managers, insurance managers, pension fund managers, and high net worth individuals about their investment strategies for the coming year
By reviewing the survey results, you can learn about the investment strategies of the top commercial real estate investors with billions of dollars of assets under management. As an active operator, you can implement some of the strategies into your investment approach. As a passive investor, you can determine if the operators you invest with are implementing the most up-to-date best practices.
Here are my top 9 takeaways from 2021’s survey results.
1. 2021 will be a seller’s market.
70% of survey respondents plan to purchase at least 20% more real estate, while only 30% of survey respondents plan to sell at least 20% more real estate. Because of the expected imbalance of supply and demand, expect more competition and higher pricing when buying commercial real estate.
2. Investors are seeking higher returns on riskier asset classes.
Survey respondents expect returns at least 200bps higher for value-add (~5% of respondents), opportunistic (~10% of respondents), and distressed (~30% of respondents) mostly due to the intense competition for good-quality assets and uncertainty related to the length and impact of the pandemic.
3. More investors than ever will pursue riskier investments.
The percentage of investors seeking opportunistic and distressed assets increased from 16% (16% opportunistic and 0% distressed) in 2020 to a record-high of 29% (19% opportunistic and 10% distressed) in 2021. Another 29% will seek value-add assets.
4. More investors than ever will seek hotels/resorts assets (but at a discount).
A record-high 11% of survey respondents will target hotels/resorts in 2021 because of the expectation of distressed sales of assets that are closed, priced undervalue, or delinquent on their mortgage. 55% expect a large discount (30%+), 41% expect a mid-discount (10% to 30%), and 4% expect a small discount of less than 10%.
5. Investors are seeking alternative real estate investments.
50% of respondents plan to invest in real estate debt, 30% plan to invest in life sciences/medical offices, 30% plan to invest in single-family rentals, 25% plan to invest in data centers, 25% plan to invest in cold storage, and 20% plan to invest in student housing.
6. Investors favor the Sun Belt markets.
The top eight markets respondents will target in 2021 are all in the Sun Belt. They are (from 1st to 8th) Austin, DFW, Greater Los Angeles, Phoenix, Denver, Atlanta, Miami/South Florida, and the San Francisco Bay area. Seattle and New York City (tied for 9th), and Charlotte, NC rounded out the top 10 markets.
(Here’s more on the best markets for multifamily in 2021.)
7. The biggest investing institutions are transitioning from gateway markets to secondary markets.
In 2020, the top markets that firms with more than $50 billion in assets under management invested in were Greater Los Angeles, San Francisco Bay area, Boston, Seattle, and Greater New York City – all gateway markets, except Seattle. In 2021, the top markets they plan to target are all secondary markets – Austin, DFW, Denver, Atlanta, and Phoenix.
8. Investors don’t expect office demand to bounce back for at least three years.
52% of respondents expect demand for office to decrease slightly (up to 10%) in the next three years while 27% expect demand to decrease significantly (10% to 30%). Only 2% expect demand to increase slightly while 0% expected demand to increase significantly.
9. Operational strategies focus on long-term trends and credit quality.
When asked about their top operational strategies during the COVID era, 60% of respondents have a stronger focus on long-term demographic and technological trends, and 50% are placing a greater emphasis on tenant credit and rent roll growth. Interestingly, only ~10% have reduced their CapEx budget and ~10% are focused on economic relief measures to retain tenants.
What do commercial real estate investors expect in 2021?
Expect 2021 to be a sellers’ market, as there are more investors who plan on buying more than there are investors who plan on selling more.
Investors will pursue riskier investment types (distressed, opportunistic, and value-add) with the expectation of higher returns.
More investors will seek hotels/resorts at significant discounts.
Investors will also seek more alternative investments, like debt, medical space, SFR rentals, data centers, cold storage, and student housing.
The Sun Belt markets (essentially the southern third of the US) will be the most in-demand.
The nation’s largest commercial real estate investment firms are transitioning from nearly all gateway markets to all secondary markets.
Investors do not expect demand for office space to return to pre-pandemic levels for at least three years.
The top operational strategies in a COVID-19 world are long-term demographic and technology trends, as well as tenant credit and rent roll growth.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.