June 9, 2021

JF2472: CBRE Americas Intentions Survey Results | Syndication School with Theo Hicks

In this episode, Theo breaks down the results of the CBRE Americas Intentions Survey. Theo talks about the 9 main takeaways from the survey as we look into what is currently happening in commercial real estate, as well as potential future trends. 

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Theo Hicks: Hello Best Ever listeners and welcome back to another episode of the Syndication School Series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks. Today we are going to break down the results of another big-time commercial real estate report. This time we’re going to talk about CBREs Annual America’s Investor Intentions Survey. I’ve really liked focusing on this report, to read these reports, and find these reports, because if you’ve got these hundreds of millions of dollars and billions of dollars institutions with these massive research firms who have access to proprietary analytics, and they’ll compile these surveys, or reports, and present them to us for free. It’s a great way to get some inside information and stay up to date on what’s currently going on in commercial real estate, as well as take a look at some potential future trends.

This is going to be a survey, so this is not based off of necessarily on a report, crunching analytics, or data. What CBRE does is ask certain commercial real estate professionals questions on a survey form and then compile the results. They ask 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. So lots of different perspectives all coming together in this one survey. It allows us, apartment syndicators, to learn about the investing strategies of these top commercial real estate investors who have billions of dollars under management. So what are the big guys doing and then how can we, as operators, implement some of these strategies into our investment approach, or as a passive investor? As a passive investor, you can determine which operators to invest with. Your passive investors are probably the very sophisticated ones who want to have a ton of money and are staying up to date on these trends, so they’ll want to make sure that you know about these trends as well.

It’s kind of like going back to being able to hack into the strategies in the mind of these big billion-dollar investors, just like when you’re selecting a target market, and you see a lot of Fortune 500 companies relocating to the area or putting their headquarters in that area. Clearly, they know something, because they’re a multibillion-dollar firm that probably spent years researching to find their corporate headquarters. Obviously, they know something, so it’s another great way to pick a market. Not solely based off of that, but it’s a good metric to see. Anyways, we’re going to talk about some of the top takeaways that I took from reviewing CBREs Annual America’s Investor Intentions Survey. You can find the full results of this survey at CBRE. You can go to their research and reports tab and then you’ll find America’s Investor Intentions Survey. I’ve got nine takeaways that I got from the survey.

The first is that 2021 will be a seller’s market. Before I dive into this, these aren’t all exactly what’s going to happen. This isn’t guaranteed, this is just the opinions again of these top commercial real estate individuals. Based off of the survey, 2021 will be a seller’s market. 70% of the survey respondents plan to purchase more real estate in 2021, while only 30% of respondents expect to sell more real estate in 2021. This is based off of 20%. They asked them “Do you plan on buying or selling at least 20% more than you did in the previous year?” So 70% said that they plan on buying at least 20% more real estate this year, whereas only 30% of the respondents plan on selling at least 20% more real estate this year. Does that mean there is an expected imbalance of supply and demand? More people expect to buy more and less people expect to sell more, which means that you can expect more competition for deals, and then as a result, higher pricing, which means that sellers should be able to get more money by selling right now.

Number two, which kind of goes counter to number one, which I thought was interesting… But to kind of just give you the mindset of buyers right now… It’s that investors are seeking higher returns than usual, or than they did in the previous years, more specifically on riskier assets. So the riskier the asset, the more respondents expect to have a higher return. This is based off of 200 basis points, so 0.2% returns. Several respondents expect returns at least 200 basis points higher for value-add opportunistic and distressed. The way that the CBRE defines these value-add is the least risky, opportunistic is the next up the scale, and distressed will be the most risky. So about 5% of respondents want higher returns on value-add deals, 10% want a higher return on opportunistic deals, and then 30% wanted higher returns on distressed deals. This is mostly due to the investor’s intense competition for high-quality assets, so core-plus assets, and then uncertainty related to the length and impact of the pandemic. They want a little bit more meat on the bone if they’re going to take a risk on a value-add opportunistic or distressed deal… Which is interesting because it’s a seller’s market, but the buyers want more returns.

Break: [00:07:25][00:09:27]

Theo Hicks: Number three, also plays to number two, is that more investor than ever are going to pursue riskier investments, which kind of might play into why they want a higher return. The percentage of investors seeking opportunistic and distressed assets was 16% in 2020, and they broke this down between 16% opportunistic and 0% distressed, so nobody wanted distressed deals in 2020. But in the 2021 survey, they had a record high of 29% who we were going to seek opportunistic and distressed deals, and it was 19% opportunistic. So kind of stable, just up a little bit from 60%. But 10% distressed, which is obviously an infinite increase, but 10% of investors planned on seeking the distressed deals in 2021. This might also play into why more people want to make higher returns on those distressed assets. And then another 29% will see value-add assets.

So again, there’ll be more competition in these riskier assets. So if you’re pursuing value-add, opportunistic, distressed deals, expect to pay more. If you’re selling, obviously, expect to be able to get more for those deals.

Takeaway number four is more investors than ever will seek hotels and resorts. But the caveat is at a discount. So obviously, hotels and resorts were one of the hardest hit asset classes during the COVID-induced recession. But based off of this survey, people are wanting to buy these now, because they can get them at a deep discount. A record-high 11% was not insanely high but still, this is a record-breaking pace from the time they’ve started the survey. 11% of survey respondents will target hotels or resorts in 2021 because of the expectation of a lot of distressed sales of assets that are closed down, that are priced under value, that are delinquent on their mortgages. So 55% of the people who expect to target hotels want over a 30% discount. Over half of the people who are targeting apartments want that juicy 30% discount; another 41% want at least 10% and up to 30%, so a mid-discount, and then 4% expect at least a small discount. That adds up to 100%. So 100% of people who are targeting hotels or resorts want a discount, and then over half want a massive discount, which I thought was kind of fascinating.

Five, investors are seeking alternative real estate investments. So not just your traditional multifamily office, hospitality, things like that. Half of the respondents plan to invest in real estate debt, for example. Another 30% plan to invest in life science or medical offices. Another 30% plan to invest in single-family rentals, which I thought was super fascinating. So we’ve got these big-time commercial real estate investors investing in non-commercial real estate single-family rentals. 25% plan to invest in data centers, which is one that I didn’t really know about until I was reviewing another report and it showed how high the returns were for data centers. Then 25% plan to invest in cold storage, and 20% plan to invest in student housing. So more creative alternative investments besides your standard core investment types.

Number six, which wasn’t necessarily a mind-blowing takeaway, but just something that’s very consistent across all real estate reports, real estate surveys, any type of market data you look at… The Sunbelt markets are doing very, very well from really all data points. So it’s no surprise that investors will favor the Sunbelt markets in 2021.

They asked the survey respondents for their top targeted markets for 2021 and the top eight were all in the Sunbelt. From first to eighth, the number one market to the lowest market, by lowest top, eighth-best is Austin, DFW, Greater Los Angeles, Phoenix, Denver, Atlanta, Miami, South Florida and then San Francisco. Then you’ve got non-Sunbelt markets running off the top 10, Seattle and New York City tied for ninth, and then Charlotte which is sometimes considered Sunbelt, sometimes not, rounding out the top 10. In all those markets, the top eight are in the Southern third or so of the US. Again, if you go to any of the blog posts we have on our website today, any of the Syndication School episodes where I’ve talked about market reports, or go to any market report that talks about the markets during 2020, Sunbelts are always topping those lists.

The seventh to takeaway is that the biggest investing institutions are transitioning from gateway markets to secondary markets. This is something that was, in a sense, happening before 2020 and before the pandemic, but a huge shift in 2021, at least in the intentions of these big-time investors. Flashing back to last year’s survey, the top markets that firms with more than 50 billion dollars in assets under management – these are the biggest investing institutions in the US – invested in were greater Los Angeles, San Francisco area, Boston, Seattle and Greater New York City, which are all gateway markets except for Seattle. In 2021, all the top markets were secondary markets. So Austin, DFW, Denver, Atlanta, and Phoenix; and they’re on the Sunbelt, too. So secondary sunbelt markets, as opposed to gateway markets. Not a single market that was targeted by investors in 2020 is a top market targeted 2021, which shows you how quickly things can change in real estate.

Break: [00:15:29][00:16:06]

Theo Hicks: Takeaway number eight, investors don’t expect office demand to bounce back for at least three years. Obviously, offices with the stay-at-home orders took a pretty big hit during the pandemic. They asked these investors when they expect the demand to bounce back, and they really don’t expect it to bounce back. Half of the respondents expect the demand for office to decrease slightly in the next three years. Not even bounce back, but just keep dropping by up to 10%. 27% expect demand to decrease significantly, so 10% to 30%, and only 2% expect demand to increase slightly, and then no one expected demand to increase significantly.

The vast majority expect the demand for office to continue to decrease for at least the next three years. It’s again, good information to know if you’re an office investor or considering investing in an office, maybe wait three years, because investors don’t think it’s going to bottom out for at least three years.

Then lastly, number nine is operational strategies focused on long-term trends and credit quality. When they asked these top investors about their top operational strategies during the COVID area, 60% of respondents have a stronger focus on long-term demographic and technological trends. 50% are placing a greater emphasis on tenant credit and rent roll growth. Then interestingly, because this kind of goes against something that we’ve talked about on this show before when we were analyzing the top COVID takeaways from the Realty Shares CEO… I believe it was the Realty Shares CEO, Jilliene Helman. We’ve talked about how they reduced their cap-ex budget, they stopped doing renovations, but only 10% of these respondents reduced their cap-ex budget. Also interesting, only 10% focus on economic relief measures to retain the residents. Two things that a lot of people talk about, which is stopping renovations and doing whatever you can to keep your tenants, wasn’t necessarily top of mind for these big institutions.

In conclusion, to summarize these takeaways, what do commercial real estate investors expect in 21? They expect it to be a seller’s market because there are more investors who plan on buying more real estate than there are investors who plan on selling more real estate. Investors will pursue riskier investment types, so distressed opportunistic and value-add, but with the expectations of higher returns on those investment types. More investors will seek hotels and resorts, but at very big discounts. Investors will also seek more alternative investments like debt, medical space, single-family rentals, data centers, cold storage, and student housing. The Sunbelt markets will be the most in-demand. The largest 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.

And lastly, the top operational strategies in the COVID-19 world are long-term demographic and technology trends, as well as tenant credit and rent roll growth. Again, this is based off of the CBRE’s Annual America’s Investor Intentions Survey. You can download that whole survey at cbre.us actually, but I basically went over all the major takeaways here.

That will conclude this episode. Thank you for tuning in. Make sure you check out our other Syndication School episodes at syndicationschool.com. We’ve also got a lot of free resources that we’re giving away with those as well. Thank you for tuning in. Have a Best Ever day and we’ll talk to you tomorrow.

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