Confident Executives Bullish On Multifamily In 2017

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The Editors's picture
Confident executives bullish on multifamily in 2017

Commercial real estate executives are especially bullish on industrial, infrastructure and multifamily properties going into 2017, based on a hypothetical survey that asked them where they would invest $1 billion.

The Real Confidence Executive Index survey polled leading C-Suite commercial real estate executives on how they would invest a theoretical $1 billion in a variety of commercial real estate investment opportunities, according to a release.

The survey reveals that multifamily remains a stable asset class as it was the second investment choice among respondents in both private equity and REITs. The year-over-year allocation increase was 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,” Richard Kalvoda, Executive Vice President at Altus Group, said in a release.

Altus Group Limited, in collaboration with the National Association of Real Estate Investment Trusts and the National Council of Real Estate Investment Fiduciaries released the survey results.

The top real estate executives completed the second annual survey focusing on their thoughts and direction for the 2017 real estate industry. One key question of the survey, asks them to hypothetically invest $1 billion in capital among a variety of real estate options falling in the areas of private equity, REITs, and public and private debt.

“We asked that these executives think outside of their usual 9-5 portfolio management scenarios and attempt to select investments and a portfolio that they believe will provide the highest total return for the year.  The aggregate of these selections comprises the $65 billion 2017 Real Confidence Executive Index that we will monitor and provide quarterly returns on throughout the year,” according to the survey.

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,” Kalvoda said in the release.
  • 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 commercial real estate 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.

Executives bullish on multifamily for 2017

“The survey results demonstrate a large overweight allocation to the industrial sector,” Mike Miles at Guggenheim Real Estate, LLC, and a survey respondent, said in the release. “The potential issues with retail, apartments (multifamily) 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,” NAREIT President and CEO Steven A. Wechsler, said in the release. “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,” NCREIF CEO Peter Steil, said in the release.

The Real Confidence Executive Index stated, “Entering 2017 brings many questionable expectations as a new president speaks of promises and changes that may stimulate or damage the broader economy and affect real estate.  Fiscal stimulus and government spending are beneficial and positive for real estate, but country tariffs and trade wars could do the opposite. 

“With those questions, our participating executives seemed to follow a more diversified approach to their real estate investing.  Overall private equity had the highest allocation at 42.6%, followed by public equity or listed REITs at 30.0%.  Even as they both are a significant portion of the total portfolio, both allocations are down from their 2016 weights.

“Other notable sectors within the public and private equity options were infrastructure and multifamily apartments. Infrastructure had the largest year-over-year investment gain up over 215% and making up 15.5% of the equity REIT portfolio.

“ Presidential comments on infrastructure growth are still based on expectations, but once a new administration can provide a detailed plan of spending, opportunities for real estate investments should follow. Even so, difficulty regarding Mexico and foreign trade policies could be a negative for this sector and other real estate options.”

Multifamily remains stable and of interest for investors

Executives are bullish on residential multifamily in 2017

“Apartments remain stable and of interest for real estate investors and developers,” according to the release. “The residential REIT investment choice was almost identical to 2016 at 17.8% up only 0.3%.  However, direct apartment investments jumped over 17% hitting 23.8%.

“Even as housing lending regulations have softened some, home buying growth remains questionable in 2017.  Student and even baby boomer debt make financing difficult for first-time buyers and others looking to relocate, according to the National Association of Realtors. Combine this with home price increases exceeding 2006 levels in some markets and demand for urbanized locations and purchasing possibilities are limited.  Interest rate increases could slow price increases, but 2017 still might be more beneficial for apartments over housing,” according to the survey.

Resources:

 Participants in the survey

The 2017 Real Confidence Executive Index Report

National Association of Real Estate Investment Trusts

The Altus Group

Guggenheim Real Estate Investments

National Council of Real Estate Investment Fiduciaries

 

About Altus Group Limited

Altus Group Limited is a leading provider of independent advisory services, software and data solutions to the global commercial real estate industry. Headquartered in Canada, the company has approximately 2,300 employees around the world, with operations in North America, Europe and Asia Pacific.

About the National Association of Real Estate Investment Trusts® (NAREIT)

NAREIT®, the National Association of Real Estate Investment Trusts®, is the worldwide representative voice for REITs, or Real Estate Investment Trusts, and publicly traded real estate companies with an interest in U.S. real estate and capital markets.  NAREIT’s more than 200 REIT members enable all investors – importantly, small investors – to achieve what, once, only large institutions and the wealthy could.

About the National Council of Real Estate Investment Fiduciaries® (NCREIF)

The National Council of Real Estate Investment Fiduciaries (NCREIF) is a non-profit trade association that serves the direct commercial real estate investment community whose members come together to address vital industry issues and to promote research on the asset class. NCREIF is dedicated to providing the institutional real estate industry with the highest standards of reliable, unbiased data, used for performance measurement, research, risk-return evaluation, and underwriting analysis in setting the foundation for sound investment decision making.

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