For global economies in general and commercial real estate in particular, 2022 was a rollercoaster ride of geopolitical tensions, economic shocks and uneven monetary policy. By mid-2023, though, Colliers anticipates that stabilization will have established itself in the global real estate market. That’s the topline assessment of the firm’s latest Global Investor Outlook Report.
“Investors will find low basis opportunities in the gateway markets of New York, San Francisco, Washington, D.C., Boston, Chicago, and Los Angeles, as liquidity events drive decision-making,” said David Amsterdam, President, U.S. Capital Markets and Northeast Region. “This will allow buyers to reposition assets, through reinvestment or conversion. Alternative asset classes such as life science are viable targets, while conversions to assets within the broader housing sector are also gaining traction.”
Among the report’s key themes are the following:
- Pricing “reset” and recalibration, before stabilization. “Inflation and higher interest rates will continue to weigh on investor decision making in 2023 as the market continues on a journey of price discovery,” the report states. A consensus among the more than 750 investors surveyed by Colliers is that pricing will decline by 10% by the end of 2023, and that value-add asset pricing will decline even more. On a global basis, while some markets have already seen a correction in pricing, particularly during the third quarter of 2022, others have yet to see one. Nearly 20% of investors told Colliers they don’t know where values will land this year. This underscores the fact that the timing of the landing, stabilization and recovery of each market and each sector will differ markedly.
- Momentum is key. “The speed with which investors can get assets into a stable position will be key to driving positive momentum, and an upturn in market activity,” according to the report. A sticking point, though, is that the market remains vulnerable to “further shocks and events that have the capacity to trigger backwards steps, as much as push the market forwards.”
- Expect the unexpected. “The factors influencing decision making are changing hourly and daily, not monthly or quarterly, so many of the benchmarks, data and analysis used to guide future activity become redundant,” the report states.
- Pockets of opportunity rather than widespread distress. In contrast to 2008, liquidity remains broadly available, leverage is generally lower and demand remains strong in most asset classes. However, the report says, “capital values will be negatively impacted by the transition to higher interest rates, so some distress will become more evident in 2023. Investors will be under pressure to refinance, and it will not be confined to owners who invested late-cycle or in high-risk assets.”
- More platform and privatization plays. Publicly traded real estate owners have been trading at a discount to net asset value for some time. “Although these discounts have started to wind back in, we will see “risk-on” private equity and other cash-rich investors take positions in the listed sector,” says the report. Additionally, tighter conditions also mean some of the larger platforms assembled by developers and asset owners will become increasingly expensive to maintain. This will lead to large-scale capital placement and direct opportunities as non-performing assets and portfolios are put up for sale to shore up balance sheets, says Colliers.
- A shift from equity to debt. “The speed at which the equity allocators and investment managers are adopting credit opportunity strategies has been a surprise,” the report quotes Jeff Black, U.S. Capital Markets Board of Advisors, Debt & Equity Lead, as saying. “They’re deploying across the capital stack, chasing what they perceive to be attractive relative risk reward versus taking common equity positions.”
- Sectors: A flight to quality, and a focus on fundamentals. Core assets prevail overall as investors focus on fundamentals and defensive strategies amid the current volatility. Office, industrial and multifamily assets continue to top the list of preferences globally, “but the weighting of interest continues to differ by region,” states the report. For example, multifamily ranked behind industrial and office globally, but was the number one choice of investors surveyed in the Americas, edging out industrial from the top slot that it held last year. And while core assets in top-tier global cities remain the preference, sectors that are tied to changing demographic and economic realities, such as multifamily, student and senior housing, continue to drive activity away from major cities into secondary and tertiary markets. Americas investors are leading the charge into tier 2 or 3 cities, well ahead of their EMEA or APAC counterparts, according to the report. “The U.S. is vastly under-housed and that is not solved in a short amount of time,” noted Aaron Jodka, Director of Research, U.S. Capital Markets. “This is especially the case in a higher interest rate environment where the cost of building materials is rising, and labor shortages are prevalent.” It’s particularly important with multifamily investments to pay attention to operational expenditure, “especially as yields / cap rates are often most resistant to change in this sector,” the report states. Operating expenses rank second only to rising construction costs among factors investors cited as negative influences on their real estate strategies for 2023.
- Sustainability driving decisions, as opposed to an afterthought. “We have seen some investors make clear decisions on where and what to buy, indeed where and what not to buy, based on their ESG-informed investment strategy,” the report quotes Damian Harrington, head of research, global capital markets & EMEA, as saying. “They’ve looked at their portfolio and they know certain buildings are going to be a problem going forward, so they have already started to offload them.”
Looking into 2023, investors surveyed cited interest rates (88%), inflation (74%) and supply chain disruption (68%) as their primary macro challenges for the year ahead. Compared to EMEA and APAC, the Americas are less concerned with deglobalization, because it will have less of a negative impact on pricing and market conditions here than overseas.
Currency fluctuation is less concerning here than it is in other global regions. The same is true of demographic pressure, since the Americas’ demographic picture is comparatively brighter than other developed nations, and energy costs.
What does concern Americas investors, though, are issues around supply chain, cybersecurity and talent availability. Domestic investors are also more likely than their EMEA or APAC counterparts to take a negative view of debt availability going into 2023.
Broadly speaking, investors are less bullish on rent expectations, although on balance the outlook is still positive. Survey respondents also displayed a more uniformly bearish view of inflation than they did a year ago, when the outlook was more mixed.
Investors have more capital on the sidelines than ever before, ready to jump on opportunities. Recapitalization, preferred equity, and mezzanine debt strategies are gaining traction and attention. Liquidity remains widely available, though the sources of capital have changed.
The Global Investor Outlook Report represents Colliers’ latest research into the capital markets. For a well-rounded perspective on 2022, be sure to read the firm’s Capital Markets U.S. Snapshot Q3 2022, U.S. Single Tenant Net Lease Report | 1H 2022, Capital Markets U.S. Snapshot Q2 2022, Alternative Assets Steal the Spotlight and Capital Markets U.S. Snapshot Q1 2022.