CRE Investors Expect Good Returns This Year

Going into 2023 has been for CRE a bit like jumping into a mountain lake and feeling that surge of cold racing through your body. The uncertainty about valuations, the economy, and interest and cap rates. It’s understandable that transactions have been down, with both private and institutional money seeing reductions.

However, for uncertain times with identifiable headwinds, there is a significant amount of optimism among investors, according to a Marcus & Millichap special report.

“Entering 2023, investors were surveyed about their investment outlook and plans for the coming year. Given the many headwinds the market still faces, the stated plans of investors may be surprising. While there’s a perception that investors have hit the pause button en masse, 59 percent of investors indicated that they plan to remain active in the first half of this year. Purchasing commercial real estate was the most popular investor plan, with 34 percent of the respondents saying they plan to buy commercial real estate in the first half of 2023. Another 17 percent indicated they plan to both buy and sell commercial real estate, while 8 percent indicated they plan to sell assets only. Of the active investors, nearly three quarters — 73 percent — indicated that they plan to grow their portfolios in 2023. Of the remaining investors, 13 percent plan to decrease their portfolio and 14% plan to keep their portfolio size stable, with offsetting purchases and sales.”

What they smell is opportunity. Demand is down. Combined with higher interest rates, that should increase the amount of available distressed inventory. That’s why 59% of all polled said that they planned to be active, whether buying or selling, in the first half of 2023. Broken out in more detail, 34% expected to buy, 17% to buy and sell, 8% sell only, and 41% to do neither.

Of course, some portion of those not planning to be active in the first half of the year might be in the second.

What has investors looking at uncertain times with confidence is the position of risk-adjusted returns. “While many commercial real estate property types certainly face some headwinds over the short term, when the yields on commercial real estate are compared to other investment options, the prospects of the real estate sector become more favorable in the eyes of many,” the report said. More than half (53%) said they expected higher risk-adjusted returns from commercial real estate than from other options during the year. Look out to a three-to-five-year horizon, and two-thirds expect higher risk-adjusted returns from CRE.

Some of the top reasons given for buying is a search for yield, opportunistic acquisitions, new fund or syndication, or a tax-related decision. For selling, timing based on original strategy or on perception of peak asset values, increase yield or reduce risk by repositioning the CRE portfolio, long-term economic concerns, or, again, tax reasons.

“That said, the outlook on investment is mostly clouded by the availability of financing, including the rates and terms influenced or set by Federal Reserve monetary policies,” the report said.