According to the Altus Group, in collaboration with the National Association of Real Estate Investment Trusts and the National Council of Real Estate Investment Fiduciaries recently released 2017 Real Confidence Executive Index, U.S. commercial real estate executives are especially bullish on industrial, infrastructure and multi-family asset classes in 2017.
"The U.S. transition of government has prompted expectations in the industrial and infrastructure sectors and we're seeing this impact in the survey results," said Richard Kalvoda, Executive Vice President at Altus Group. "Anticipated tax cuts and increased spending from the New Administration is expected to further strengthen the commercial real estate market in 2017."
The Real Confidence Executive Index survey polled industry leading C-suite level CRE decision makers on how they would each allocate a theoretical $1 billion in commercial real estate investments to get the best returns for 2017. The Real Confidence Executive Index is based on these allocations and represents a total theoretical investment of $65 billion in a variety of commercial real estate investment opportunities. This year's index allocation saw 43% of the total capital allocated to direct real estate investments or private equity, followed by 30% to public equity, commonly known as REITs. On the debt side, private debt received a 20% allocation while public debt received 7%.
The industrial sector took the top spot as the preferred asset type for investment, believed to be the greatest beneficiary of the macro changes expected to come from the New Administration. It received the highest allocation in both public and private equity selections with a 40% year-over-year increase in industrial from the private equity selections and a 61% increase in industrial from the REIT side when compared to the 2016 survey. For private equity, the West received the highest industrial allocation at 38%, while the East received 34%, which represents a 108% increase over 2016. "This suggests strong confidence that the industrial market will continue to outperform as demand drivers remain robust," added Mr. Kalvoda.
The survey also reveals multi-family remains a stable asset class as it was the second investment choice among respondents in both private equity and REITs. Dropping from its first place spot in 2016, the year-over-year allocation increase was minimal in the REIT sector, but up 17% in private equity. "Continued rental demand, along with the challenging consumer lending environment, contributes to the expected stability of this asset class in 2017," said Mr. Kalvoda.
Other key highlights from the 2017 Real Confidence Executive Index include:
Allocations to the infrastructure sector grew by 216% from the 2016 survey, "likely driven by the anticipation of major infrastructure projects under the New Administration," said Mr. Kalvoda.
Portfolio diversification was a key trend as only 8% of the respondents put all $1 billion into one quadrant which included two all-REIT portfolios and three all-private equity portfolios suggesting market volatility and uncertain political expectations played a role in the allocations with investors choosing to minimize risk factors.
While respondents still preferred direct private equity CRE investments in the West, the East-West allocation gap tightened with the West representing only 5% more over the East, supported by an allocation increase of almost 20% year-over-year in the East and a 15% decrease in the West.
Private debt financing had a significant increase, up 52% over last year. Investment interest in public debt also grew with a focus on CMBS - AAA securities which were up over 20% compared to the 2016 survey.
"The survey results demonstrate a large overweight allocation to the industrial sector," said Mike Miles at Guggenheim Real Estate, LLC, and a survey respondent. "The potential issues with retail, apartments and office are real and very apparent. On the other hand, the potential issues with the industrial sector are less apparent at this time. However, a potential change in trade policy from the New Administration could have an impact on this sector, causing a shift in both the type and location of the most desired industrial assets." "We are pleased to share the results of this innovative survey," said NAREIT President and CEO Steven A. Wechsler. "The Real Confidence Executive Index Survey offers perspective on the economic and marketplace factors that will shape our industry from the decision-makers who are leading it."
"Experience is key when investing in commercial real estate, so observing how these seasoned executives allocated capital in this survey provides great insight on the market," said NCREIF CEO Peter Steil.