Current investment landscape
The recent failure of Silicon Valley Bank and other large regional banks has created increased uncertainty for real estate investors. The bank failures caused even more conservative underwriting standards with less credit flowing into the economy, aiding the Fed’s inflation fight but heightening risks. Given the still-strong U.S. labor market, CBRE expects the Fed to hold rates at current levels for most of the year following its 25-bps interest rate hike in May. We expect a recession to take hold by H2 2023, as the lagged effects of prior hikes are felt more broadly.
Market activity should begin to recover when there is clarity on interest rate movement and confidence in an economic recovery. CBRE now believes investment volume will begin to recover in Q4—one quarter later than our earlier forecast—and continue into 2024. Altogether, CBRE forecasts a 27% decrease in U.S. commercial real estate investment volume from 2022’s $728 billion.
CBRE anticipates many of the dynamics that provided the basis for strong fundamentals and attractive investment opportunities for certain property types (excluding the office sector) will remain in place despite near-term cyclical challenges. As a result, current uncertainty presents a brief window of opportunity where lower asset pricing is available before the anticipated market recovery begins. This report outlines three investment approaches to capitalize on opportunities.
In today’s uncertain market, investors can consider one of the following investment strategies based on risk tolerance. This Viewpoint explains each of these strategies in detail, identifying the most attractive opportunities in certain commercial real estate sectors and regions.
Conformist, involving the purchase of mainstream assets with strong demand and rent growth. These include:
- Industrial & logistics facilities near transportation hubs serving major U.S. metros
- Well-established multifamily properties in Sun Belt markets, which have continued to register strong rent growth
- Life-sciences assets in top market clusters
Contrarian, involving riskier investments, which can potentially produce outsized returns. These include:
- Hotels in leisure markets that continue to benefit from post-pandemic pent-up travel demand despite slowing economic growth and uncertainty
- Retail assets in high-growth cities and live-work-play districts that offer positive long-term outlooks
- Harvest gains in industrial & logistics and multifamily assets—particularly those requiring refinancing—purchased in the past few years
Vintage, involving investments based on market timing, which will be especially important as the market slowdown gives way to recovery. These include:
- Publicly traded real estate investment companies, such as REITs, trading below their net asset value
- Debt investments for high quality assets that are not easily financed or have a debt funding gap
- Prime assets at price discounts, with a relatively short window of opportunity
Industrial & Logistics
Despite the expectation of slower occupier demand this year, U.S. industrial & logistics real estate is expected to perform well, particularly in the Sun Belt.
The most attractive opportunities are in well-known logistics hubs that continue to see strong demand, solid rent growth and low vacancy, such as Miami and Orlando. Markets with port infrastructure, such as Charleston and Northern New Jersey, offer opportunities too. Investors should also consider assets in other markets with strong historical performance and well-established inventory, including Chicago, Inland Empire and Los Angeles.
Other investment opportunities include last-mile logistics facilities in big cities with large consumer bases and a strong big-box retail presence, such as Los Angeles and Phoenix.
Figure 1: Top U.S. industrial investment markets
Source: CBRE Research, Q1 2023.
We expect multifamily volumes to be down throughout most of 2023. Still, tailwinds—especially the relatively high cost of home ownership at present—will continue to provide a favorable outlook over the medium-term. Additionally, while we anticipate fundamentals will be impacted by a recession, given these tailwinds, many markets will be somewhat insulated from recessionary impacts.
Major and high-growth multifamily markets with low vacancy rates will present the most attractive investments opportunities. These generally are Sun Belt markets with continued population and employment growth, such as Nashville, San Diego, Charlotte and Orlando.
Figure 2: Top U.S. multifamily investment markets
Source: CBRE Research, Q1 2023.
Life sciences job growth and real estate demand will remain strong, despite the sector’s dependence on capital markets, which have become markedly more constrained.
The top life sciences research clusters of Boston/Cambridge, San Diego and San Francisco offer the most attractive investment opportunities due to their strong talent base, nearby research universities and venture capital availability. The Northeast Corridor markets of New York, New Jersey and Washington, D.C. also present good opportunities thanks to the size of their talent pools and presence of leading universities.
Demand for life sciences real estate will remain healthy in large Sun Belt markets, such as Atlanta, Miami and Houston, primarily due to talent attraction and venture capital funding, and in emerging markets like Salt Lake City, Nashville and New Haven, CT.
Figure 3: Top U.S. life science investment markets
Source: CBRE Research, Q1 2023.
Although highly sensitive to market cycles, the hotel sector continues to benefit from pent-up demand coming out of the pandemic. This trend is amplified by inbound international travelers—led by China and Japan. These travelers tend to visit west coast markets such as Las Vegas, San Diego, Los Angeles and Hawaii. There is also minimal new hotel construction.
Select and limited-service hotel fundamentals are strong, with particularly compelling opportunities in leisure-focused markets with RevPAR well above 2019 levels, such as Savannah, Miami and Phoenix.
Figure 4: 2022 U.S. hotel RevPAR as a percentage of 2019
Source: CBRE Hotels Research, CBRE EA, Kalibri Labs, Q1 2023.
The retail real estate sector continues to benefit from strong consumer spending, rising rents and minimal new construction that has kept vacancy rates relatively low. Though we do expect some impacts to fundamentals as the economy weakens, retail assets in high-growth markets and live-work-play districts, particularly in the Sun Belt, offer the best investment opportunities.
High-growth markets like Raleigh, Nashville and Salt Lake City also present good opportunities due to their sizeable talent clusters, high employment growth and robust population growth.
Figure 5: Top U.S. retail investment markets
Source: CBRE Research, CBRE Econometric Advisors, MSCI Real Assets, RSMeans, Q1 2023.
Industrial & Multifamily
Although industrial and multifamily assets are expected to perform relatively well even in a weaker economy, rising interest rates and more conservative lending standards are a meaningful headwind. As a result, some investors may want to lock in profits in these sectors by selling assets that have appreciated considerably.
CBRE posits that even with a hypothetical 15% drop in industrial capital values from their peak in 2022, sales of industrial assets in key U.S. markets would still provide investors who acquired them in years prior with substantial profits. To illustrate this, we used a hypothetical sale of an industrial asset acquired in Q1 2016.
Figure 6: Change in industrial capital values since Q1 2016, comparing actual value growth (light green) with a hypothetical 15% drop in values (dark green)
Source: NCREIF, CBRE Research, Q1 2023.
Similar trends, although less pronounced, are also apparent in the multifamily sector. Strong capital value growth in Sun Belt markets, including Atlanta, Miami and Los Angeles, enable investors to exit with handsome profits, even if asset values declines reach 15%.
Some large gateway markets are possible exceptions to this trend since values didn’t increase as much in those markets.
Figure 7: Change in multifamily capital values since Q1 2016, comparing actual value growth (light green) with a hypothetical 15% drop in values (dark green)
Source: NCREIF, CBRE Research, Q1 2023.
Identify value discrepancy between public and private markets
Price dislocation between the public and private markets could offer opportunities, particularly with REITs and other listed vehicles trading below their net asset value (NAV). While U.S. REITs have bounced back in recent months, they remain off highs, with many still trading under their NAV.
Figure 8: U.S. REIT Index by Sectors (Jan. 2021 = 100)
Source: CBRE Research, Wilshire Associates Incorporated, May 2023.
Debt investment opportunities
U.S. banking sector stress has shined a spotlight on commercial real estate debt. Although CBRE’s analysis does not indicate commercial real estate debt will endanger the U.S. financial system’s health, we do see conditions that will reduce the flow of credit into the sector.
As a result of financial market volatility, we have observed opportunities to finance properties with challenges accessing debt capital through traditional channels. This includes assets in the range of $30 to $50 million values. This size is too large for small banks and too small for many debt funds’ consideration. There are assets within this value range that have strong fundamentals and rental growth prospects, particularly in the industrial and multifamily sectors. As a result, we believe these areas will present compelling investment opportunities.
The U.S. real estate industry at-large is experiencing property value declines due to rapid rate hikes and a softening economic outlook. This will create funding gaps as investors are forced to refinance at a lower LTV ratio or when value has fallen since origination. CBRE’s Econometric Advisors studied this issue and estimates the funding gap for senior commercial real estate loans has reached $72.5 billion. Most of this will be concentrated in the office sector, where values have taken the greatest hit. We expect further significant distress in the office sector, but investors will seek to fill the funding gap for high-quality assets. This will increase demand for mezzanine debt and opportunities for fast-moving lenders. We also anticipate some opportunities for equity investors as asset owners seek to fill funding gaps.
Key takeaway: best pricing is fleeting
Past economic downturns have shown the window to acquire solid assets at a discount is somewhat brief. Buyers should move swiftly to capitalize on pricing discounts, since top-quality properties are the most resilient during economic downturns. The optimal period to purchase prime assets following the Great Financial Crisis lasted roughly six to 12 months, according to CBRE’s analysis. Investors who purchased properties during this period enjoyed attractive returns, as the market recovered, and cap rates compressed.
CBRE believes the opportune moment for U.S. acquisitions will be in H2 2023, when we expect a moderate recession.
Figure 9: New York—CRE Investments Pre- & Post-GFC US$500m+ (2005-2015)
Source: MSCI Real Assets, CBRE Research.
Note: Size of bubbles denote transaction volume of deal at point of sale.
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