By Dwight Stenseth
Facing high valuations and heavy competition, investors have seemed somewhat reluctant to aggressively pursue acquisitions in 2019. As the year nears an end, we’re getting a clear sense that many companies have been executing acquisition strategies this year that are more restrained. It seems the buy side is underwriting with much more discipline than a few years ago.
We believe that part of this caution is the fact that it’s been a decade of growth and recovery for the commercial real estate sector. Previous real estate cycles have not typically lasted nearly this long. At this late stage of growth, people agree that there are reasons to be on the lookout for a correction/recession on the horizon. At the same time, being too conservative can lead to missing out on opportunities that still exist in a marketplace where fundamentals remain strong.
As the ULI Emerging Trends in Real Estate report for 2020 put it, there is “a continued shortage of deals with desirable yields; there are more investors chasing deals than there are good deals available.” This could be a source of caution for some investors. However, a recent survey conducted by NAIOP with key decision makers came back with a positive outlook for the CRE market based on their perceptions and predictions. NAIOP’s Commercial Real Estate (CRE) Sentiment Index’s score of 57 as of September 2019 indicates expectations for steady growth in commercial real estate performance and that development conditions should improve at least slightly in the coming months. Not only are occupancy rates and rent expected to increase in 2020, but continued availability of capital and debt financing is expected for most projects.
These types of differing opinions can, no doubt, be confusing. Why the disparity? Our anecdotal evidence from talking with our investors and contacts in markets across the U.S. reveals a mix of these same sentiments, perhaps leaning toward more of a cautionary view in light of overall economic and political uncertainty in the U.S. and abroad, in spite of favorable conditions within the certain real estate markets.
We believe that general market conditions are in a state of uncertainty given the length of the current economic cycle and the certainty that a recession must happen at some point. These recession worries loom based on geopolitical issues, Federal Reserve activities, the pending 2020 election and real estate lenders getting more cautious. It’s very difficult to predict for an upcoming presidential election year, especially with complicated variables that can impact labor availability and prices for construction material. However, if a recession occurs, it will most likely be slight given the level of economic activity and will most likely lower costs for labor and material even though occupancy rates could suffer simultaneously. Continued but selective investment is our plan as we anticipate more opportunistic investments being available in a more tempered market in the next year or two.