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2011 Investor Sentiment Report


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2011 Investor Sentiment Report

  1. 1. A Special Research Report2011 Real Estate Investment OutlookInvestor Confidence SurgesLow interest rates, improving fundamentalsfuel acquisition plans I nvestor confidence soared in the fourthFIguRE 1. OPTIMISM ABOuNDS quarter, and that positive sentiment isSince 2004, National Real Estate Investor and Marcus & Millichap Real Estate translating to more aggressive plans toInvestment Services have conducted research on investor attitudes and expec- acquire commercial real estate in 2011. The exclusive National Real Estatetations as part of a commercial real estate industry forecast. The data gleaned Investor/Marcus & Millichap Investorfrom the research provided the foundation for the Investor Sentiment Index, Sentiment Index shows that investorwhich reached 152 in the fourth quarter of 2010, the highest level since its in- sentiment has surged to a record levelception. What’s significant is the dramatic improvement in sentiment compared of 152 — a huge increase over the 119with the third quarter, when the index level registered 119. A slowly improving rating achieved in third quarter. In fact,economy, limited new supply and improving capital markets are responsible for the most recent index rating tops thethe spike in investor confidence. [Figure 1]. previous all-time high of 148 recorded in 2005 [Figure 1].150 The Investor Sentiment index takes into account investors’ views on antici- pated changes in property values, as well125 as their plans to increase or decrease total real estate holdings in the coming year. The survey was conducted online100 100=BASELINE between Nov. 11, 2010 and Jan. 11, 2011 and yielded 508 responses. The index results may sound too 75 good to be true, particularly in light of the current market that remains fraught with uncertainties. Yet the fourth-quarter 50 survey results signal a potential inflec- 2004 2005 2006 2007 2008 2009 1Q 2010 3Q 2010 4Q 2010 tion point in the market and indicate Survey Methodology In November, National Real Estate Investor’s research unit and Marcus & Millichap e-mailed invitations to participate in an online survey to public and private investors and developers of commercial real estate. Recipients of the survey included Marcus & Millichap clients as well as subscribers of NREI and Retail Traffic selected from commercial real estate investor, pension fund, and developer business subscribers who provided their e-mail addresses. The majority of respon- dents are private investors (35%), developers (20%) and private partnerships (18%) with an average of $39.8 million invested in commercial real estate. REITs and institutional investors represent 5% of all respondents. The survey yielded 508 valid responses. 2011 Real Estate Investment Outlook 1
  2. 2. 2011 Real Estate Investment Outlook: Optimism Abounds ies, coupled with a stronger economicFIguRE 2. ExPEcTATIONS FOR INTEREST RATES outlook, pushed interest rates up dra-When do you expect interest rates to increase? matically in fourth quarter. Although the 10-year Treasury yield jumped about 80 First quarter 2011 10% basis points over a 30-day period, it was still hovering at a relatively low 3.4% as Second quarter 2011 16% of Jan. 21st. Despite that recent increase, the 10- Third quarter 2011 22% year yield is still at very low levels his- Fourth quarter 2011 13% torically and a full percentage point lower than it was in December 2007. The ex- 2012 or later 27% tension of Bush-era tax cuts, payroll tax Unsure 10% reduction and extension of unemploy- ment benefits are acting as a $900 billion No answer 2% stimulus package. The vast majority of investors (84%) 0% 10% 20% 30% 40% 50% said that they either strongly agree orBase: respondents to the 4Q 2010 survey, 508. somewhat agree that interest rates at un- precedentedly low levels are a driving force in their decision to increase com-investors are showing increasing confi- more risk tolerance,” states Hessam mercial real estate investment in 2011.dence in commercial real estate even as Nadji, senior vice president and man- An additional 78% believe that commer-they remain wary of potential pitfalls. aging director at Marcus & Millichap cial real estate offers favorable returns The majority of investors (75%) con- based in Encino, Calif. relative to other investment classes, andtinue to view the slow economic growth The incredibly low interest rates, another 62% believe that the market hasas their top concern, followed by avail- thawing of capital markets, and moder- bottomed out.ability of financing (59%), government ate economic growth are all contributing Low interest rates provide an impor-regulation on both taxation and envi- to growing investor confidence. “Inves- tant hedge against a slow recovery, asronmental issues (54%), and unforeseen tors are seeing this as the bottom of the well as any unforeseen economic issuesshocks to the economy (46%). market, and seeing this as an opportunity that might emerge. “On the conserva- While respondents don’t have blind- to get back into commercial real estate tive side, the low interest rates are beingers on, 69% plan to add to their property more aggressively,” Nadji says. viewed as a very effective safety net forportfolios over the next 12 months, which being a little more risk tolerant and get-again is a sizable increase over third- Interest rates spark activity ting back into the market,” Nadji says.quarter survey results where only 61% of Much of the rising confidence is rooted And if the commercial real estaterespondents held a similar view. Among in the fact that investors have a sense that market does perform better than expect-respondents who expect to bolster their the commercial real estate market has ed, then the rent growth and occupancyinvestment in commercial real estate in reached bottom and the economy is go- improvement that comes on top of these2011, the average projected increase in ing to get better. But even more important low interest rates that are locked in fortotal dollar volume is 21%. is the current ability to lock in extremely five, seven, or 10 years is an added bo- “The most important thing that we low long-term interest rates. nus, he adds.see from the survey results is that sev- Some profit taking by bond inves- More than half of respondents (61%)eral converging factors are beginning tors after the Federal Reserve’s recent believe that interest rates will rise at leastto shift the attitude of investors toward announcement to purchase U.S. Treasur- somewhat in 2011. [Figure 2]. 2011 Real Estate Investment Outlook 2
  3. 3. 2011 Real Estate Investment Outlook: Optimism Abounds for commercial real estate,” Nadji says.FIguRE 3. INvESTOR PERcEPTION OF PROPERTy TyPES “But I do not anticipate underwriting cri-n In your view, is now the time to buy, hold or sell each of the following property types? teria changing significantly, or any majorn Percentages reflect the only the opinions of respondents invested in each property type loosening in the way deals are getting done today.” 100% 72% 70% 49% 45% 44% 49% 42% Apartments, hotels lead recovery 90% Fourth-quarter survey results indicate 80% that the commercial real estate market has reached bottom. Apartments and ho- 70% tels are leading the way in the market re- 60% covery. “Those two sectors are showing 44% 39% the fastest improvement in fundamentals 50% 43% 44% 40% as you would expect,” Nadji says. 40% Both apartments and hotels operate on much shorter-term leases than other 30% 27% property types, and are able to increase 22% 20% rents more quickly as the market im- 4% 10% 15% proves. In fact, hoteliers have the ability 10% 8% 5% 5% 1% 3% 2% 8% 2% 3% 4% to reset room rates daily. 0% Apartment Hotel Industrial Mixed-use Office Retail Undeveloped Some 72% of apartment investors Landa believe now is the time to buy followed Buy Hold Sell No Answer closely by 70% of hotel owners who be- lieve now is the time to increase acquisi- Only respondents invested in the property type are included in the column for that property type. tions. Owners of other property types are less bullish with 49% of retail, 49% of industrial, and 44% of office owners indi- inflation if the Fed doesn’t act at the right cating now is the time to buy [Figure 3].Investors wary of QE2 impact time and magnitude on tightening. The strong appetite for apartments andAlthough there doesn’t appear to be any Respondents are not optimistic about hotels is tracking along with confidencecatalyst that will boost rates rapidly in QE2. One-third of investors (34%) believe in improving fundamentals. Hotel inves-2011, investors are keeping a close eye on the move will actually hurt the U.S. dol- tors are the most optimistic. Some 73%government policy that calls for a second lar and the economic recovery compared of respondents who are already investedround of quantitative easing, commonly with 21% who expect the policy to help in hotel properties predict that values willreferred to as QE2. As part of QE2, the the recovery gain momentum. Investors rise in 2011. The average increase will beFederal Reserve Bank intends to stimu- appear more confident in the commercial 6.5%, according to respondents.late the economy by purchasing about real estate recovery. However, questions Apartment owners followed closely$900 billion in bonds by the end of 2011. remain as to whether that confidence will behind with 61% reporting that they expect “Whether you like it or don’t like it, be sustainable in 2011. Will that renewed values to rise by an average of 4.8%. ThatQE2 will be somewhat of a mechanism to confidence also prompt both investors and is a big shift compared to a year ago whenkeep a lid on interest rates,” Nadji says. lenders to assume more risk? only 31% of apartment owners and 20% ofIn the short term, that bodes well for both “If we start to see commercial banks hotel owners expected values to rise.real estate and the economy. In the long move back into the market and more Similarly, investors in those segmentsterm, QE2 could produce greater risk of willing to lend, that will be a big positive have much more bullish expectations 2011 Real Estate Investment Outlook 3
  4. 4. 2011 Real Estate Investment Outlook: Optimism Aboundsabout rental growth than a year ago. Over- factor behind nearly half of the office faster than anyone anticipated,” Nadjiall, 62% of apartment investors expect ef- owners thinking now is the time to buy says. Retail vacancies are showing signsfective rents to rise in the next 12 months office buildings,” Nadji says. of stabilizing due in large part to the dropup from 23% a year ago. On the hotel front The national office vacancy rate rose in new development and positive netthe shift has been even more dramatic with from 17.4% in the second quarter to absorption in the last three quarters.68% of investors expecting effective rents 17.6% in the third quarter, while effec- The volume of completed retail spaceto rise in contrast with just 7% who felt tive rents fell 3.6%, according to Marcus dropped to 35 million sq. ft. in 2010,that way last year. & Millichap. Nearly one in four respon- which is down from the 100.1 million sq. Yet that response is not surprising dents (22%) believes that the value of ft. that was built in 2009. That dramaticconsidering that both apartments and office properties will continue to decline decline has helped the stabilization ofhotels are already recording higher occu- in the coming year, although the aver- vacancies in 2010 at 10.2%, and will helppancies and rents in select markets. The age change expected is a 0.5% increase. speed up the recovery in 2011 and 2012,national apartment vacancy rate, for ex- More office owners (45%) believe values according to Marcus & Millichap.ample, dropped from 7.8% in the second will remain the same, while 31% expect More than one-third of retail inves-quarter to 7.1% at the end of third quar- values to rise, and 2% had no answer. tors expect the value of retail propertiester, while effective rents remained rela- Respondents have remained consistent to rise an average of 2.3% in 2011, whiletively flat with a nominal 0.2% decline, in their outlook for industrial properties. 48% believe values will remain theaccording to Marcus & Millichap. The majority of investors, 64%, believe same, 13% predict a decline, and 1% had On the hotel side, the three key per- that effective rents will remain the same no answer.formance metrics — occupancy, average over the next 12 months, while 22% predict “I think the optimism that we’re seeingdaily rates (ADR) and revenue per avail- an increase, 12% anticipate a decrease, and today is grounded in terms of economicable room (RevPAR) have all improved 2% had no answer. If that holds true, that improvement, the ability to take advan-in the past year. Based on data from the would be a welcome change for the sector, tage of still-low interest rates, and confi-first week of December, occupancy has which saw an 11.2% decline in year-over- dence that the bottom has been reached forexperienced a year-over-year increase year effective rents during the third quar- the economy and commercial real estate,”of 4.7% to 49.9%; the ADR rose 0.5% ter, according to Marcus & Millichap. Nadji $96.87; and RevPAR increased 5.3% Industrial vacancies remained flat However, that optimism may be aheadto $48.31, according to Hendersonville, during the first nine months of 2010 at of investors’ ability to actually close onTenn.-based Smith Travel Research. 12.9%. Many investors believe that the transactions, Nadji emphasizes. “The industrial market is at the bottom, which 69% of respondents who say they want toConfidence rising in other sectors explains why nearly half of industrial increase investments are going to have toRespondents are becoming more positive owners (48%) believe that now is the be a lot more realistic about pricing, andon the office outlook, but sentiment lags time to buy, compared to 45% who think a lot more realistic about yields,” he says.the improvement in retail. “The fact that now is the time to hold, 5% say it’s time “We expect more interest in Class-B andthe worst is over for occupancy losses to sell, and 2% had no answer. B-minus investments that have not seenand we are seeing gradually improving “The dark horse in this race could be the buying frenzy that the top-tier assetsdemand for space is the most important retail. Retail is actually recovering much have already experienced.” n Retail Traffic 249 W. 17th Street Marcus & Millichap National Real Estate Investor New York, NY 10011 16830 Ventura Boulevard, Suite 352 6151 Powers Ferry Road, Suite 200 (212) 204-4200 Encino, CA 91436 Atlanta, GA 30339 (818) 212-2700 (770) 618-0215