There is so much uncertainty globally that nothing is predictable! Economic factors impacting commercial real estate, such as record-high valuations and property pricing, rising interest rates, and an overall structural shift in the global economy are but some of the many variables that investors must contend with as they evaluate the allocation of their assets and portfolio performance. Location, sector and demand drivers remain at the forefront.
Changing trends in real estate add yet another dimension and complexity to these variables. And then there are game changers such as technology, an undeniable urbanization shift, and the impact of collaborative communities, altering demographics, an unstable employment, transit connectivity and other infrastructure issues. Added to that are regulatory pressures, changing capital flows, shifts in currency pricing, a stronger dollar, the rising cost of borrowing and much more. The list goes on and on.
Will all of this result in a dislodging of fundamentals and CAP rates? As most savvy investors know, the fundamentals of real estate do not change overnight. Real estate, particularly U.S. real estate, is and remains a sweet spot in the global arena for investment security and capital appreciation. Additionally, there still remains an investor preference for real estate.
There may be a lot more capital and investor diversity than previously estimated. The amount of capital raised and waiting to be deployed remains enormous. Fund managers’ “dry powder” (AKA liquid assets available for investing) for closed-end real estate funds, has reached a record $227 billion (Prequin, 2016). Further, could foreign capital increase to a startling 25% of U.S. volume in 2016? Will we continue to witness transformative M&A activity, where companies try to capitalize on economies of scale? Yes, overall in the United States, we are moving from double-digit price appreciation to a steady, single-digit market. And while commercial transaction activity has begun to cool, all of this unpredictability may even contribute to market vibrancy. After all, isn’t the economy meant to perform well in an election year? Nothing is predictable, but real estate investment is still one of the best performing, and competitive, of all capital strategies.