and Posted by Heidi Schwartz Amid slow-but-steady economic growth, more commercial real estate executives are looking to develop assets and deploy capital in secondary markets to generate returns, according to the 2014 Commercial Real Estate Outlook Survey conducted by KPMG LLP, the U.S. audit, tax and advisory services firm. Of the 100 senior commercial real estate executives surveyed, 68 percent expect to increase capital spending in 2014, up from 60 percent in 2013. Forty-four percent of executives said their company is finding quality investment properties in the marketplace, but not at prices that deliver sufficient returns. When asked which types of properties their company would be looking to acquire/invest in, respondents said Class A assets in primary markets (25 percent, down significantly from 48 percent in 2013); development opportunities (24 percent, largely unchanged from 25 percent in 2013); distressed assets (17 percent, up from 7 percent in 2013); Class A assets in secondary/tertiary markets (16 percent, up from 12 percent in 2013); Class B/C assets (14 percent, up from 3 percent in 2013); and “other” (4 percent). “As pricing in primary markets continues to climb due to the large influx of investment dollars in recent years, real estate executives are developing assets and deploying capital in secondary and tertiary markets to generate higher yields,” said Greg Williams, National Leader of KPMG’s Real Estate practice. “This is a trend we will continue to see as real estate companies look to manage assets effectively and create alpha in this slow growth economic environment.”
Turning attention to second and third-tier markets in search of yield
When asked to identify the regions with the best real estate investment opportunities in the U.S., respondents said the Southeast (48 percent, up from 28 percent in 2013); Southwest (33 percent, down from 45 percent in 2013), Midwest (31 percent, up from 16 percent in 2013); Northeast (30 percent, down from 36 percent in 2013); Northwest (16 percent, down from 20 percent); and “unsure” (10 percent). Outside the U.S., executives believe South America (23 percent), Asia Pacific (20 percent), and Central America (18 percent) are the regions with the best real estate investment opportunities. “Real estate investors are showing renewed interest in the Southeast given the manufacturing boom underway in the region and the expansion of the Panama Canal, which will bring dramatic changes to ports, cities, distribution centers, manufacturers and transportation hubs along the coast,” said Chris Turner, Southeast Leader of KPMG’s Real Estate practice. “Those investors who understand how the canal will affect supply chain routes and know which communities are maximizing Federal infrastructure grants to support Panama Canal projects stand to gain a first-mover advantage in the market.” In fact, the majority of respondents (45 percent) said their company would increase spending the most on “geographic expansion” in 2014, and 28 percent of respondents (up from 16 percent in 2013) cited “entering into new markets” as the initiative most expected to consume senior management’s time and energy in 2014.
Foreign Direct Investment in U.S. Real Estate Expected to Increase
Overwhelmingly, 80 percent of executives expect foreign investment in U.S. real estate to increase. Roughly 40 percent of respondents expect an increase in foreign investment by 6 to 10 percent, followed by 17 percent expecting it to increase by 1 to 5 percent, 16 percent expecting it to increase by 11 to 20 percent, and 8 percent expecting it to increase by more than 20 percent. “We’ve seen a substantial amount of Chinese capital deployed in 2014, and we expect that trend to continue as real estate funds, large institutions and foreign investors look for direct and indirect investment in real estate equity and real estate debt because of the attractive yields,” said Phil Marra, KPMG’s National Real Estate Funds Leader.
More Real Estate Executives Considering an IPO
The number of real estate executives considering an IPO doubled from 8 percent in 2013 to 16 percent this year. “The recent success non-traded REITs have had accessing the public market and the emergence of new REITs, including those capitalizing on opportunities in the single-family-home rental market as well as other non-traditional real estate owners, are driving more real estate executives to consider an IPO,” added Williams.
Marketplace Challenges Persist
When asked to identify the issues posing the biggest threat to their business models, 32 percent of executives indicated the speed and magnitude of the economic recovery as their top concern, followed by lack of job growth (30 percent), inability to find investments delivering sufficient returns (23 percent) and the impact of new regulations/legislation (22 percent)—a notable decrease from last year’s survey, when the majority of respondents, 40 percent, cited political and regulatory uncertainty as their top concern. A copy of the full KPMG 2014 Commercial Real Estate Outlook Survey report can be found here.