CRE Investors Slow To Deploy Capital Amid Global Headwinds
Commercial real estate transaction volume is falling back worldwide as investors keep their eyes on macroeconomic factors.
Global investment activity in commercial real estate was down 9.4% to $181B from Q1 2016 to Q1 2017. The drop is most pronounced in the Americas, which experienced a 16.6% decline in investment volume; EMEA dropped 1.3% and Asia Pacific real estate investment was down 5.8%, according to CBRE’s Global Property Perspective report.
Among the biggest challenges, CBRE reports, is the political uncertainty wreaking havoc around the globe. In the U.S., proposed policy changes, the investigation into President Donald Trump’s Russia ties and the constant overturn of White House staff has not evoked much confidence in the new administration’s ability to push through the business-friendly policies Trump promised on the campaign trail.
Within the last 12 days alone, Sean Spicer left his role as White House press secretary, and Trump removed Anthony “The Mooch” Scaramucci as White House communications director after just 10 days. One government policy expert told Bisnow Trump’s new team will be hard-pressed to see its legislative goals through to completion without a massive change in personnel.
“While the rise in policy uncertainty has not significantly affected economic growth, it chips away at confidence that is the bedrock of capital flows,” CBRE’s report reads.
This turmoil is not limited to the U.S. Brexit continues to ruffle investors' feathers in the United Kingdom as experts try to predict how the U.K.’s exit from the European Union will impact the industry. According to CBRE’s Global Economic Policy Uncertainty Index, these concerns have not really impacted economic growth, but they have eroded investor confidence in the country’s ability to produce strong, long-term yields should they invest.
“The policy agenda is far from clear for the next 12 months, but the reduction in the number of significant elections is helpful for global investors,” CBRE reports.
The tightening of financial markets coupled with the inflated state of U.S. real estate pricing has also caused some concerns. Though banks are still lending, credit standards for construction loans remain tight — as evidenced by the rise of non-bank alternative lenders that are taking on mezzanine debt, preferred equity and other bridge loans to fund commercial projects. High property valuations and a drop-off in real estate yields are also contributing to the decline in deal flow.
“If we look at the cap rate spread over bonds on a market-by-market basis, we see a general tendency for the lower spreads to be in the Americas. This is the region that has seen the most pronounced drop-off in investment transaction,” the brokerage reports, though experts added that cap spreads in the Americas have eased a bit early in the year, which may spark a rebound in investment activity.
Taking into account the late stage of the cycle, experts have noted one trend that is likely to persist: in addition to flocking to gateway markets, foreign investors are gradually breaking into secondary markets as they search for better risk-adjusted returns.
“One explanation is that international investors are now targeting 'smaller' non-global-gateway markets, where evidence suggests that good opportunities remain,” CBRE reports.
CORRECTION, AUG. 1, 10:35 P.M. ET: A previous version of this story incorrectly stated former White House Communications Director Anthony Scaramucci was fired. That has yet to be confirmed. The story has been updated.