Commercial real estate investors in the US favor opportunistic strategies and favor secondary markets in 2023 amid concerns about higher interest rates and tighter financial market conditions, according to the findings of CBRE’s latest US Investor Intentions Survey.
The survey, which covers all types of assets, finds that this economic uncertainty is weighing on investment sentiment in 2023, as more than half of investors expect buying activity to fall from 2022 levels. Almost a third (29%) of investors will look to opportunistic and distressed assets to take advantage of market conditions in 2023, compared to 19% in 2022.
“While weaker macroeconomic conditions and rising interest rates will weigh on commercial real estate investment volumes in 2023, the amount of capital targeting the sector remains abundant,” said Chris Ludeman, global president of capital markets at CBRE. “Investors are willing to take on higher risk for higher returns and other metrics such as lower leverage, higher debt service coverage ratio and a renewed focus on acquiring assets at a discount to replacement cost have come to the fore. We expect investment activity to pick up in the second half of the year as market conditions stabilise.”
Most investors expect discounts across all sectors, with malls and value-added office properties likely to offer the biggest discounts. Despite changes in strategy and pricing, nearly 70% of investors expect no change in fund allocations to real estate from last year.
Investors continue to favor high-performing secondary markets, with Sunbelt cities being the most attractive. Dallas is the top target market, followed by Austin, Miami, Los Angeles and Nashville.
Apartment blocks remain the most sought-after sector (38%), particularly apartment complexes, followed by industrial (28%), led by modern logistic facilities in key markets. Shopping centers are the most popular sub-sector for retail investors, while office investors predominantly prefer class A properties in prime locations.
In the current high-yield environment, real estate debt is considered the most attractive investment alternative, followed by build-to-rent, life sciences, self-storage, affordable housing, data centers and student housing.
“Despite ongoing conservative underwriting, most lenders are currently both new and winning new business, although they expect new origination to be down 10% year-on-year,” said Rachel Vinson, president of Debt & Structured Finance in the US at CBRE . “Concerns about maturity risk and more conservative underwriting criteria from traditional credit sources – focused on broader entry and exit caps and higher bond yields – will contribute to the continued rise of opportunistic investors. While uncertainty lingers, capital needs, whether for tenant fit-outs, fundamental improvements or ESG upgrades, are certain. The question remains how long both lenders and borrowers can wait.”
Other key findings from the 2023 survey (performed in December 2022):
- Investors cite rising interest rates, a possible recession and limited credit availability as their biggest challenges this year.
- Investors are reluctant to sell assets when market prices are falling – 60% say they will either sell less or not at all, while just 27% expect to sell the same amount as last year.
- While investors remain committed to ESG, nearly half of respondents say the deteriorating economic outlook will limit the extent to which they consider ESG criteria in their investment decisions.