“I think in the first half of the year capital will rush to put money to work ahead of the election and before the Fed changes its mind on interest rates.”
What could bring the CRE markets down, or at least to a pause, this year? Tariffs didn’t do it; the inverted yield curve (or re-inverted as recent events show) had no effect.
One possibility is the US presidential election, according to RCM/LightBox’s National Investor Sentiment Report.
Before the election, however, investors will rush to place money, creating a temporary surge in activity in the first two quarters. “I think in the first half of the year capital will rush to put money to work ahead of the election and before the Fed changes its mind on interest rates,” K.C Conway, CCIM chief economist says in the report. “The wind is at your back for the first six months.”
The report, which surveyed investors, found that the top threats to CRE investing this year include a wait-and-see approach until after the 2020 presidential election (33.5%), topped only by a change in economic conditions at 34.9%.
For the moment, CRE investors, brokers and lenders remain optimistics about 2020, with experts pointing to the strength of market fundamentals, the availability of capital and global investor confidence.
There are some cracks in this picture, though.
According to Conway, about 52% of the $4.3 trillion in total CRE debt in the US is held by banks. Given the slowing economy, banking regulators are looking closely at that allocation and may force a pull back, he says. “Any developer who relies on capital to keep the business moving might want to diversify lending sources,” he says. “While we all want to be loyal to a long-term lending source, we’re heading into a cycle where that might be dangerous. Many development projects are years in the planning and any disruption to the financing can create challenges.”
This is not true for all CRE sectors, though. Multifamily, for example, remains robust. “As 2020 gets underway, we are confident diversified capital flows into multifamily will drive transactions, despite the possible uncertainty which may occur as a result of the political influences of the 2020 presidential election,” says Brian McAuliffe, President, Capital Markets for CBRE, who focuses on the multifamily sector. “We don’t anticipate a significant change in activity, but we’ll see as we head through the first few quarters,” he says in the report.
And even though a significant downturn appears unlikely, many companies are already taking a more defensive stance in evaluating target markets, identifying assets for acquisitions, and defining underwriting criteria, according to the report.
“If I had to put a word on the coming year in terms of the economy and the market the word would be deceleration,” says Hugh F. Kelly, CRE Special Advisor at Fordham University’s Real Estate Institute. “We’ve enjoyed a very long run of expansion, to the point where pricing is very high for most commercial real estate assets. At the very least we should be focusing on things slowing down in 2020.”
By: Erika Morphy (GlobeSt)
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