Real Estate Investors Target Secondary Markets


Infographic - Top 10 Real Estate Investment Markets
Real Estate Investors Target Secondary Markets

Opportunistic Strategies in 2023, CBRE Survey Finds

Commercial real estate investors in the United States favor opportunistic strategies and show a preference for secondary markets in 2023 amid concerns about higher interest rates and tighter financial market conditions, according to CBRE’s findings. the latest US Investor Sentiment Survey.

The survey, which covers all asset classes, finds that economic uncertainty is weighing on investment sentiment in 2023, with more than half of investors expecting to reduce buying activity compared to 2022 levels. Nearly a third (29%) of investors will target opportunistic and distressed assets in 2023 to take advantage of market conditions compared to 19% in 2022.

Chris Ludeman, Global Head of Capital Markets for CBRE, said: “Although weakening macroeconomic conditions and rising interest rates will weigh on commercial real estate investment capital in 2023, the amount of capital targeting the sector remains high. ” “Investors are willing to accept more risk to achieve higher yields and other metrics such as lower leverage, higher debt service coverage ratio, and once again focus on acquiring assets at a discount to the cost of transportation are all brought to the fore. We expect that investment activity will pick up in the second half of the year as market conditions stabilize.”

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Most investors expect price reductions across sectors, with value-added shopping centers and office buildings expected to offer the biggest discounts. Despite changes in strategy and pricing, almost 70% of investors expect no change in the allocation of funds for real estate from last year.

Investors continue to prefer high-performing secondary markets, with Sun Belt cities being the most attractive. Dallas is the main target market, followed by Austin, Miami, Los Angeles and Nashville.

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Multifamily remains the most sought-after sector (38%), especially apartment complexes, followed by industrial (28%), driven by modern logistics facilities in major markets. Relocation centers are the most popular subsector for retail investors, while office investors mostly prefer grade A assets in prime locations.

In the current high-interest environment, real estate is considered the most attractive alternative investment, followed by building-to-rent, life sciences, self-storage, affordable housing, data centers and student housing.

Rachel Vinson, Head of Lending and Structured Finance in the US for CBRE, said: “Despite continued conservative underwriting, most lenders are now attracting and winning new business, although they expect new originations to be down 10% compared to last year. ” “Concerns about access risk and more conservative underwriting criteria from traditional lending sources – focused on wider leverage and higher loan yields – will contribute to an increase in opportunistic investors. While uncertainty continues, the need for capital, what for tenant construction, fundamental improvements or ESG upgrades, the question is how long both lenders and borrowers can wait.”

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Other key findings from the 2023 study (done in December 2022):

  • Investors cite rising interest rates, a potential recession and limited credit availability as their biggest challenges this year.
  • Investors are hesitant to sell assets with weak market prices – 60 percent say they will sell less or not at all, while only 27% expect to sell the same amount as last year.
  • While investors remain committed to ESG, nearly half of respondents say that a worsening economic outlook will limit the extent to which they consider ESG criteria in their investment decisions.

Source

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